How to get a $5,000 debt consolidation loan

So you have $5,000 in debt and wonder if a debt consolidation loan is the answer. Debt consolidation can be a great solution, especially when dealing with a manageable amount, like $5,000. We'll help you decide if a consolidation loan is your best bet, what it takes to qualify, and alternatives worth considering. 

When is a $5,000 debt consolidation loan a good idea?

Even though $5,000 feels like a lot of money to the person who owes it, this amount is on the low end for debt consolidation loans. You’ll mainly be comparing balance transfer credit cards and personal loans ($5,000 is too small for a home equity loan or HELOC). 

A balance transfer could be a good idea if you qualify and don’t need much time to repay the debt. You’d want to pay off the balance while your account has a 0% or very low interest rate, or very soon after that special rate expires. Otherwise, it’s easy to find yourself stuck in a never-ending cycle of juggling high-interest debt.

The option that makes sense for most people is a personal loan, so that’s what we’ll focus on here. A $5,000 personal loan for debt consolidation can be an excellent option if:

• You can land a lower interest rate. Getting a lower interest rate is one of the most popular reasons to consolidate. Let's say your $5,000 debt is on credit cards with an average annual rate of nearly 30%. You apply for a personal loan and find out you qualify for a 17% loan. In that case, moving the debt to the personal loan could make perfect sense. 

• You want a precise payoff date. If you use an installment loan to pay off your credit card debt, you’ll know from the start how long it will take to pay off that debt. If you take out a 36-month loan and make all of your payments, you can be confident that the debt will be paid in full in 36 months. 

• You want a single payment. Juggling multiple debts can be stressful, and there’s a greater risk of missing a payment and getting hit with a late fee. A personal consolidation loan is designed to reduce the number of bills you have to pay. 

• You can afford the monthly payment over three to five years. Take a look at your monthly budget to decide how much you can afford to pay each month toward a consolidation loan. You're on the right track if the estimated monthly payment on the loan fits neatly into your budget. 

• You have the credit and income to qualify. While most lenders require a minimum credit score of 640 to 660, don't assume that a lower score disqualifies you. Some lenders may be more flexible.

Can you qualify for a $5,000 loan?

There are several important things to know about qualifying for a $5,000 consolidation loan, including:

• $5,000 is often the minimum personal loan amount offered by lenders. 

• Most lenders require a good credit score to qualify for a personal loan, although this varies by lending institution. 

• Approval is based on more than a credit score. Leaders also consider your income and debt-to-income ratio (the amount of your income that goes toward debt each month).

• If you've fallen behind on debt payments, options other than loans may be a better fit. 

Is a $5,000 consolidation loan affordable for you?

Your monthly budget is unique to you. Whether you can afford a $5,000 consolidation loan depends on your budget. For most people, the monthly payment on a $5,000 loan is likely to be affordable. 

Let's say your $5,000 debt consists of credit cards, with an average annual percentage rate (APR) of 29.99%. If you paid $150 each month until the cards are paid off, it would take you six years and one month to be debt-free, and you would pay a total of $5,878 in interest. In other words, you'd pay more in interest than the original debt. 

On the other hand, here are some examples of how much you'd pay on a $5,000 consolidation loan with a five-year repayment term:

Here's how to know if a consolidation loan isn't worth it: If the interest rate on the personal loan is higher than the rates you're paying on current debt, it's probably not worth it to take on the new loan. 

If you’re struggling and you can’t afford a payment, even after consolidation, you might need to explore debt relief or bankruptcy to get rid of the debt.

Things to consider

Before signing on the dotted line of a personal loan contract, here are a few issues worth considering:

• Total interest paid. While a lower monthly payment is nice, it's not the only thing that matters. Ideally, you want to pay less in total interest.

• How much time you have. Your timeline matters. Let's say you have a child heading to college in a few years or you're planning to retire. Think about how long you're willing to carry the debt. 

• Your situation. Ultimately, consider whether a personal loan will improve your overall financial situation. If not, you have your answer. 

What if a loan doesn’t work out?

If a personal loan doesn't work out, you're not at the end of the line. You have plenty of other options to streamline your debt without a consolidation loan. For example:

DIY payoff

Among all the do-it-yourself payoff methods, two favorites are debt avalanche and debt snowball. Here's a brief rundown of how each works. 

Debt avalanche method

Debt avalanche is a repayment strategy that focuses on paying off debts with the highest interest rates first. 

1. List your debts, from highest interest rate to lowest.

2. Make minimum payments on all debts except for the one with the highest interest rate.

3. Use any extra money you have to pay down the debt with the highest rate.

4. Once you've paid off the highest-interest debt, add its payment to the minimum payment you were already making on the next debt. 

5. Repeat 

Debt snowball method

The debt snowball method is similar to the avalanche method, except you focus on paying off your smallest debts first. Paying off small debts quickly can help keep you motivated. 

1. List your debts, from smallest balance to largest.

2. Make minimum payments on all debts except for the smallest.

3. Use any extra money you have to pay down the smallest debt.

4. Once you've paid off the smallest debt, move on to the next smallest.

5. Your payments should get bigger each time you clear a debt. That’s the snowball you’re looking for. 

Debt management plan

A debt management plan (DMP) is a structured repayment plan designed to help you deal with unsecured debt, such as medical bills, personal loans, payday loans, and credit card debt. DMPs are administered by nonprofit credit counseling agencies. 

Once you sign up, here's how it works:

1. A professional credit counselor evaluates your overall financial situation.

2. The counselor contacts your creditors to ask them to join your plan and to find out what they’re willing to do to make your debt more affordable. They might agree to lower your interest rate or waive certain fees. 

3. You’ll be asked to agree not to use credit while you’re in the plan. You might be asked to close your credit card accounts. Closing your credit card accounts before they’re paid off is likely to have a negative (but temporary) impact on your credit standing.

4. You make a single monthly payment to the agency you're working with, and that agency distributes the funds to your creditors following the agreed-upon plan. Depending on the amount of debt you have, the payment could be high.

5. A DMP usually lasts three to five years. You’ll pay off your debts in full.

Hardship program

Some creditors offer a hardship program, a financial aid initiative to help people struggling to pay their debts. The goal is to give you the time and space you need to get your finances in order and get back on track. Creditors may temporarily pause payments, reduce interest rates, lower payments, or waive fees. 

Debt settlement

A debt settlement program lets you resolve your debts for less than the full amount you owe. You can negotiate with your creditors directly or let a debt relief company negotiate on your behalf. While not all creditors are willing to negotiate debt, many are. 

What’s next?

These steps can help you determine which path is right for you. 

• Check your credit report. Even a small mistake on your credit report can lower your score, and a lower score could make it harder to get the loan you want. Order a copy of your reports from the major credit bureaus—TransUnion, Equifax, and Experian—by visiting annualcreditreport.com. Check each report over carefully, looking for errors. If you find any discrepancies, dispute them. You have to dispute errors with each credit bureau separately.. 

• Compare rates. To find the best loan, check out multiple lenders. Talk to lenders who offer prequalification with a soft credit check that doesn’t affect your credit score.  

• Examine your household budget. Ensure your budget has enough room for the expense. 

• Take action. Choose a strategy and get started. The sooner you begin, the sooner you can create the financial life you want.

You're not alone. As you work toward paying off $5,000 in debt, you have plenty of people and resources available to help.