A debt consolidation loan might make your life easier. Here’s how to get one.

By Miranda Marquit

Reviewed by Gina Freeman

Jul 30, 2023

Read time: 6 min

Father using the laptop with son at home

Key takeaways:

  • A debt consolidation loan can simplify your monthly payments and de-stress your life.

  • Alternatives include debt acceleration, debt resolution, and debt management.

Debt is fickle. If you’re bogged down, debt can produce a stressful negative vibe. On the other hand, making progress toward getting rid of your debt can be energizing. Many people on the debt payoff journey say that as the balance goes down, they feel lighter and more hopeful. Paying off a debt brings a unique feeling of satisfaction.

This stuff isn’t aspirational. You can do it. We’ll tell you how. 

When you make a conscious decision to strategically get rid of your debt, you have choices to make. One strategy to consider is debt consolidation. 

Let’s explore what debt consolidation is, how to get a debt consolidation loan, and how to know if it’s the best choice.

Understanding debt consolidation loans

Debt consolidation means using a new loan to pay off several existing balances. The right debt consolidation loan can do more than just streamline your payments. It could free up cash each month, and even help you pay off debt faster. 

People usually consolidate debt when they can get a better loan than the ones they’re consolidating. If you take on a personal loan at 12% interest to pay off several credit cards with 25% rates, you could pay a lot less interest. Spending less on interest leaves you more money for reducing balances. This can help you clear your debt faster. 

How to get a debt consolidation loan

The debt consolidation loan process isn’t hard. Just work through the steps below. 

1. Check your credit 

When you get a loan—including a debt consolidation loan—your credit standing matters. Lenders check your credit to decide if you’re a good risk and to determine your interest rate. Know where you stand.

There are several free ways to view your credit score online. Your bank, credit union, or credit card issuer might give you free access to your credit score. Equifax and Experian, two of the major credit reporting agencies, also offer free credit scores on their websites. If you reach a page that asks for your credit card number, you’ve clicked on a feature that’s not free. Start over.

It’s also a good idea to review your credit reports for accuracy. Sometimes, mistakes can negatively affect your score. You can request one free credit report each from Equifax, Experian, and TransUnion every 12 months from annualcreditreport.com. You don’t have to get all three at the same time.

2. List your debts

List your debts (creditor name, balance, monthly minimum payment, and interest rate). Arrange them from highest rate to lowest. 

This inventory helps you determine your consolidation loan amount. It can also help you prioritize which debts to include in the consolidation.

3. Consider your loan options

Personal loans are usually unsecured. This means you don’t have to put up collateral (property the lender can repossess) to get financing. You’ll typically need to pay back a personal loan within two to five years. 

On the other hand, the way home equity loans work is that you will pledge your home to the lender as a guarantee that you’ll repay the debt. This makes them less risky for lenders, and less risk for them could mean lower rates for you. It also means, however, that if you fail to repay the loan, you could lose your home. 

Home equity loans have terms ranging from five years to 30 years, and 15 years is typical. Longer terms mean lower payments. However, the longer you take to repay a loan, the more interest you’ll pay. 

Here are a few things to consider as you decide between a personal loan or a home equity loan for debt consolidation:

  • Are you a homeowner? As you might expect, a home equity loan requires you to own a home. If you’re a homeowner and hoping for a larger loan or a longer term, a home equity loan might make sense.

  • Do you have enough equity in your home? Your equity is your home’s current market value minus the amount you still owe on your mortgage. Home equity lenders typically allow you to borrow against about 80% of your home’s value, depending on your credit score and other factors. 

  • How much do you need to borrow? Home equity loans can be better for large amounts because loan limits tend to be higher, interest rates can be lower, and repayment terms are generally longer compared to personal loans. 

  • How good is your credit?  For people with excellent credit, personal loan interest rates are comparable to home equity rates. And the loans often fund in one to three days and require no collateral. If your credit scores are lower (even as low as 640), it may be easier to get approved for a home equity loan than an unsecured personal loan.

4. Choose a loan and apply

Once you’ve decided which type of debt consolidation loan works best for you, it’s time to apply.

  • Get prequalified: Most lenders allow you to prequalify for personal or home equity loans. This tells you how much you could borrow and what rate to expect. And many lenders do this with a soft credit check. That helps protect your credit.

  • Review fees, interest, and other details: Make sure that the new loan has better terms than the debts you plan to consolidate. Compare the cost of consolidating to the amount you expect to save in interest. Look at the loan’s APR, or annual percentage rate. APR helps you compare the total cost of each loan. The loan with the lowest interest rate doesn’t always have the lowest total cost.

  • Apply for your loan. You’ll need to complete an application, document your income, and provide bank account details to receive your funds. To speed up processing, be prepared to supply any requested information or documents.

  • Figure out the fees. Most loans come with fees and other costs. You can pay them up front, which is cheaper in the long run. Or you can often roll them into the loan, which is nice if you’re cash-strapped. 

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What to expect after you apply

Lenders can often get proof of your employment and income by using software. But they may need documents from you. Here are common requests to expect:

  • Most recent pay stub 

  • Tax returns if you’re self-employed or have commission or bonus income

  • W-2s if you’ve been at your job less than two years

  • Copies of statements for banking, retirement, and investment accounts

  • Explanations for any credit problems or income glitches

  • For home equity loans, you may have to pay up front for a property appraisal      

  • Divorce decree if you pay or receive alimony, or court order for child support                                                                                                                               

In many cases, a personal loan can be approved within minutes, and you might get your funds as early as the next business day. (If speed is important, ask about turnaround times when choosing a loan.)

Home equity approvals take longer. Lenders check the value of your property—either with a full appraisal, a drive-by appraisal, or a desk appraisal. That adds processing time. Home equity loans are mortgages—they must be publicly recorded by your county. Mortgages also involve title and escrow services, which add to processing time. 

Finally, you have to wait for three days after signing your home equity loan documents to get your money. This waiting period is required by law any time you take a loan against a home in which you live. 

What to do if your application is denied

If your debt consolidation loan isn’t approved, you have alternatives to deal with your debt:

  • Debt acceleration: Create your own debt paydown plan using the snowball or avalanche approach. With the snowball, you pay the minimum on all your debts except the one with the smallest balance. Put extra payments toward your first debt until it’s paid off. Then tackle the next-smallest debt, and so on. The avalanche method is the same, except that you tackle the debt with the highest interest rate first, then the next highest, and so on. You’ll pay off your debts in full.

  • Debt resolution: With a personalized plan you can afford, a team of experts can help you resolve your debts. In other words, negotiate with creditors to clear your debts for less than the full amount you owe. You may be able to get out from under debt faster and for less. 

  • Debt management plan (DMP): Debt management plans are offered by credit counseling services. You enroll your unsecured debt into a plan and make a single monthly payment, which is distributed to your creditors. You’ll pay off your debts in full, but you can sometimes get reduced interest rates or fees.

The best way to find out more about these options is to get a free debt evaluation. You can discuss your situation with a debt consultant and find out how the different options would work.

Author - Miranda Marquit

Miranda Marquit is an award-winning freelance writer and podcaster who has covered various financial topics since 2006. Her work has appeared in numerous media outlets, and she is frequently asked to host workshops and appear on panels on topics related to financial wellness. She is the co-host of the Money Talks News podcast and a consumer finance advocate and spokesperson for moving hub HireAHelper.

Gina Freeman - Author

Gina Freeman has been covering personal finance topics for over 20 years. She loves helping consumers understand tough topics and make confident decisions. Her professional history includes mortgage lending, credit scoring, taxes, and bankruptcy. Gina has a BS in financial management from the University of Nevada.

Frequently asked questions

Yes, it’s sometimes possible to get a debt consolidation loan with bad credit. You may be more likely to qualify if you have something to borrow against, like home equity. However, if you can’t get a loan, there are other ways to get rid of debt if you have bad credit

You need to go through an application process, and not everyone will be approved. Prequalification can give you an idea of whether you’re likely to get a debt consolidation loan without getting a hard credit check.

Debt resolution is a legitimate way to negotiate with your creditors to accept less than the total amount you owe. It could help you get rid of debt faster than just by making minimum payments. While it’s not a loan, professional debt resolution helps reduce debt stress because you make one affordable monthly payment, and experts negotiate with your creditors for you to reduce your debt. Debt resolution could be a good idea when you truly can’t afford to pay your debts in full.

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