Are you struggling to pay off your debts? If you have been looking into ways you can pay off your loans, you must have already heard about debt consolidation loans. These kinds of loans let you roll your multiple, high-interest debts into a new loan, usually with low interest rates.
Depending on the terms of the loan, you could save money on the interest and pay off the debt sooner. But before you apply for one, it’s best to understand thoroughly what you will need to qualify for such loans so you can better your chances of approval and how it might affect your credit.
How do you qualify for a debt consolidation loan?
- Check credit score
Debt consolidation loans usually require you to have a minimum credit score of 700 to get competitive interest rates. However, not every lender will scrutinize your credit score that harshly. If you have a credit score less than 700 but a decent income debt ratio, they will still accept your loan application. Additionally, if you have a bad credit score, lenders may still accept your application albeit with a higher interest rate.
- List out all debts
Make a list of all the debt accounts you want to consolidate. Note the amount you owe, the interest rate, and the monthly payments. Add all of them to know how much money you will need to consolidate the balances. Once done, add all of your minimum payment amounts to figure out how much of a monthly payment you can afford on a debt consolidation loan. Then use an online loan calculator to see the terms and interest rates you’ll need to negotiate for the loan to consolidate your debt.
- Compare lenders
Every lender will offer you different terms and rates. Don’t make any rushed decisions. Look around first. Some lenders offer online prequalification options, consider using them to assess your approval chances. Prequalification also lets you see potential loan offers and interest rates without affecting your credit score negatively.
- Apply for the loan
Different lenders will ask for different documentation. Gather all information and documentation your lender requires you to submit before applying for it to ensure the processing period is hassle-free for you. Though it will vary by lender, here are some of the usual documentation lenders ask you to submit:
- Proof of income
- Proof of identity
- Proof of address
Once you have your documents in order, you can go ahead and submit the loan application. Some lenders also allow you to apply online, offer a quick approval and let you upload the required documents online for the final approval. Traditional banks and credit unions require you to visit their office to apply and their processing time will be much longer compared to online lenders.
- Pay off your new loan
Once all your old debts have been paid off, you are left with your new loan. The repayments will be due every month but they are fixed, hence predictable. Add that to your monthly budgets to make sure you never miss any.
How does a debt consolidation loan impact your credit score?
A debt consolidation loan should help you build your credit score, as long as you use the fund to successfully pay off your debts and you pay it off on time. You will also undergo a hard credit check when you apply for such loans, which will knock a few points off your credit score, but that is temporary. Missed payments can affect your credit score negatively.
There are ups and downs to practically everything. A debt consolidation loan is no different. If you’re considering this to get out of debt sooner and save money, analyze the pros and cons before applying. You should also research the lending process so you will know what to expect and can take the necessary steps to increase your approval chances. We hope this helps you understand debt consolidation loans a little more.