How to qualify for a debt consolidation loan

You’re learning about the best ways to pay off your debt. That’s a smart financial move. The right strategy could help you organize your debt and‌ save money on interest as you pay it back.

Debt consolidation is a popular option, especially for large amounts of debt. But maybe you’re wondering whether you qualify. Getting approved could be easier than you think. Let’s look at how to qualify for a debt consolidation loan to find out if it makes sense for you.

Can anyone get a debt consolidation loan?

Not everyone qualifies for a debt consolidation loan. But many people do, even with imperfect credit.

When you apply for a personal loan to consolidate debt, the lender reviews your information and decides whether to approve you. Negative marks on your credit don’t necessarily mean your application will be denied. Plenty of lenders are open to applicants who don’t have spotless credit files.

What do you need to qualify for a debt consolidation loan?

Most lenders require a fair or good credit score, steady income, and room in your budget for the loan payment. A score of 640 or higher could improve your odds of approval and lead to better loan terms.

Here’s a breakdown of the typical requirements for a debt consolidation loan:

• Fair credit score or higher. A credit score of 640 or higher is helpful, but you may be able to qualify with a score as low as 600, depending on the lender and the type of loan.

• Consistent income. You don’t need a huge salary, but lenders want to know there’s a stable source of income. A full-time job that you’ve been at for years isn’t a must, but it helps.

• Reasonable debt-to-income (DTI) ratio. Your DTI ratio is your monthly debt payments divided by your income. For example, if you have $1,000 in debt payments and earn $4,000 per month, then your DTI ratio is 25%. Lenders typically look for a DTI ratio of 43% or lower, including the new loan you want. 

• Good recent payment behavior. If you’ve been paying your credit cards and loans on time, that’s a point in your favor when applying for a loan.

How hard is it to qualify for debt consolidation?

Qualifying for debt consolidation depends on your financial situation and your credit.

Here are some of the common challenges to getting a debt consolidation loan:

• Poor credit score. A low credit score makes it harder to get a debt consolidation loan. You might want to pay down your debt first to improve your credit, and then apply for a loan with a higher score.

• High DTI ratio. Lenders are wary if a large portion of your income already goes toward debt. Once again, paying down debt first may help, as you could lower your DTI ratio before applying for a loan.

• Irregular income. If your income goes up and down, a lender might worry about your ability to make your loan payments.

• Limited credit history. When you haven’t built much credit yet, lenders aren’t sure how trustworthy you are as a borrower.

These issues aren’t always dealbreakers, but they usually have some impact on loan terms. Lenders normally charge higher interest rates to applicants who seem like riskier borrowers.

Why am I not eligible for a debt consolidation loan?

You might not be eligible for a debt consolidation loan if you have too much debt or if you’ve missed payments in the past. Other possible reasons include a low income relative to your debt or not having any credit history.

If you’ve been declined for a debt consolidation loan, you should receive a letter in the mail explaining why. Lenders are legally required to send a letter with their reasons for denying an application. You can use the information in this letter to decide on your next steps, whether that’s trying another lender or a different repayment strategy.

What if you don’t qualify for a loan?

A debt consolidation loan could be a great way to manage debt, but it’s just one option. If you’re having a tough time with debt and didn’t qualify for a loan, consider these alternatives.

Debt management plan

A nonprofit credit counseling agency can set up a debt management plan (DMP) for you. A DMP is an agreement between you and your creditors to pay off your debt in three to five years. You make one monthly payment, and your credit counselor divides the money among your creditors. It’s like debt consolidation without a loan.

If you’re enrolled in the debt management plan, your credit counselor can work with you on budgeting and managing your money so that you’re able to afford your debt payments.

The monthly payment on a DMP could be high, so make sure you can afford it before you agree. Also, you generally need to stop using credit while on the plan.

Debt relief

If you can’t afford to fully repay what you owe, you might qualify to resolve your debts through debt relief. Resolving debt means getting the creditor to agree to accept less than the full amount you owe. The rest is forgiven. 

In a debt relief program, you set aside money every month, to build up funds for offering your creditors. This monthly deposit may be lower than your current minimum payments. The debt relief company negotiates with your creditors on your behalf. 

The debt relief process usually has a negative impact on your credit score. But when you’re dealing with ‌financial hardship, debt relief could be a way to get back on your financial feet.

Bankruptcy

Bankruptcy is a legal process for consumers who can’t repay their debts. When you file bankruptcy, it provides legal protection from your creditors. You might also be able to get your unsecured debts discharged (forgiven).

Bankruptcy has pros and cons. It’s a public record and can stay on your credit history for seven to 10 years. Some people are eligible to walk away from their unsecured debts in just a few months. 

How to improve your chances of getting approved for a debt consolidation loan

Pay down debt, correct credit report errors, avoid new credit applications, and consider applying with a co-signer or for a secured loan.

Here’s a more detailed look at the steps you can take to improve your approval odds:

• Pay down debt balances. Paying down debt could improve your credit score and lower your DTI ratio. Both are beneficial for your loan application.

• Fix errors on your credit report. Every week, you can get a free copy of your credit report at AnnualCreditReport.com. If you spot any mistakes, dispute them with the creditor and the company that issued the credit report. Getting errors removed could boost your credit score.

• Pause new credit applications. Too many recent applications can be a red flag for lenders.

• Add a co-signer. When you apply for a loan with another person, the lender looks at your co-signer’s finances, too. If your co-signer has good credit, that could work in your favor.

• Try a secured loan. This type of loan requires collateral, so lenders are often more flexible about approvals. If you’re a homeowner, you could consider a home equity loan for debt consolidation.

• Prequalify with a soft credit check. Most lenders have a prequalification process available. You can find out if you’re likely to be approved for a loan, without any impact on your credit.

If you qualify, what does that mean for your debt?

Once you get a debt consolidation loan, you use it to pay off your debts. One immediate benefit is that you only have one fixed monthly payment going forward instead of multiple payments on different accounts.

Your debt consolidation loan will have a firm end date if you make all your scheduled payments. It could also have a lower interest rate than what you were paying before.

Here’s what it could look like if you have $15,000 in debt spread across five credit cards, with rates ranging from 25% to 30%. You’re able to pay $450 per month toward those cards. The monthly payments are amounts you could put toward each card, not what the minimum payments would be.

Here’s a possible alternative: You borrow a four-year, $15,000 loan with an 18% interest rate and use it to pay off all your credit cards.

You now know that if you make your loan payments, you’ll be done paying off your debt in four years. The loan in this example also charges less interest, which would save you thousands of dollars on your debt. Checking if you’ll come out ahead financially is one of the essential questions before using a personal loan to consolidate debt.

What’s next?

At this point, you know the ins and outs of debt consolidation. You’re ready to check your credit, if you haven’t already, and explore lenders.

There’s always a path forward. That may be a personal loan for debt consolidation. Or, if you own a home, you could tap into the equity to get a loan. If you’d like personalized assistance, Achieve can help. Talk to a debt expert today to learn about your options and take the next step toward getting rid of debt.