If you’re struggling with high-interest credit card debt, you can use a debt consolidation loan to pay it off. This can help you save money, pay off your debt faster, and reduce your monthly payments.
What is a Debt Consolidation Loan?
A loan taken to pay off other outstanding balances by merging them into a single fixed monthly payment is referred to as a debt consolidation loan. These usually result in a lower interest rate and monthly payment, allowing you to pay off a sizable debt load faster than you would making minimum payments on multiple debts.
Check Those Credit Scores
While it’s possible to get a debt consolidation loan with a FICO credit score of less than 690, your chances are better if it’s at least that number. Borrowers with good credit are also generally eligible for the best interest rates. When you look up your credit score, it’s important to examine your credit reports for errors. Mistakes do happen, and they can hurt your eligibility to borrow money. Correcting it could improve your credit score and in turn, your loan eligibility at better interest rates.
Before applying for a debt consolidation loan, be clear about why you want one, beyond streamlining bill paying.
Some common reasons for taking out a consolidation loan include to:
- Save money. Look for a loan with a lower interest rate than you’re currently paying so that more of your monthly payment goes toward the balance rather than interest.
- Pay off debt faster. Seek the shortest loan term possible with payments you can afford. It’s also a good idea to figure out how your debt accumulated so that you can avoid a recurrence if possible.
- Have smaller monthly payments. Choosing a longer-term loan can cost more in interest over the long haul. But spreading out your payments will reduce the amount you owe every month and keep more of your money in your pocket.
Target the Loan Search
Once you understand what you want to accomplish through debt consolidation, you can refine your search for lenders.
This is the time to shop around for the best loan rates and terms possible. Casting a wide net can help. For instance, you can check out online rate-shopping sites, or try individual banks, or credit unions..
Beyond the interest rate, take the time to learn of any additional fees the lender might charge including an origination fee.
While targeting your search, make sure each lender you consider conducts a soft credit pull initially, to protect yourself against credit score downturns that can accompany “hard” pulls.
Apply for a Consolidation Loan
After locating the best lender, it’s time to apply. Required documents vary among lenders, but will generally include pay stubs, bank statements, tax returns, and a copy of your driver’s license or other government-issued photo ID.
The loan process may take a few days, depending on the lender. During this time, it’s a good idea to be on the lookout for a lender phone call or email seeking more information. That way, a loan decision can be rendered sooner rather than later.
Repaying the Loan
Once you have the loan, enrolling in automatic payments can prevent late or missed payments. This is also a good time to start saving more and spending less, to avoid a repeat of this situation.