Debt can be overwhelming, especially when spread over more than one account and juggle multiple monthly payments. Debt consolidation loans can make your debt more manageable by combining all of your balances into a single personal loan with one monthly payment.
If you are considering getting a debt consolidation loan, this step-by-step guide will walk you through the process.
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1. Check your credit
You’ll want to know your credit score before diving into credit applications. This will help you get an idea of the types of debt consolidation loans you qualify for.
There are many ways to get your credit score for free. For example, your credit card may offer free credit scores. And Experian offers a free basic membership that includes your credit score.
2. Get your credit report
It is also advisable to look for errors in the credit report before applying for credit. Getting your credit report is different from checking your credit score, so you will have to do it separately. You can get a free credit report from the three major credit bureaus at AnnualCreditReport.com.
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Review all three to make sure everything on your credit history is correct. If you find a mistake, discuss it and make sure it is removed before applying for a debt consolidation loan. Removing inaccurate bad credit marks should give your credit score a good boost, helping you qualify for the best personal loans.
3. Make a list of your debts and monthly payments.
Next, you’ll want to review all of your accounts and list the total balance, monthly payments, and interest rate for each one. This should include all of your:
You will want this information for the next step, which will help you determine whether a debt consolidation loan will actually be financially beneficial for your situation.
4. Consider your loan options
Once you know your credit score, you should have an idea of the debt consolidation loans that you can qualify for. Just be sure to consider all of your options, such as:
And in particular, pay attention to the following features:
You will want to get the lowest APR possible to keep the loan affordable, but you will also want to get a loan that is large enough to pay off all of your debts.
You’ll need a loan term long enough that your monthly payments are manageable, but not long enough that you end up spending more on interest than necessary.
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Lastly, be sure to pay attention to any other fees associated with the loan, such as origination fees or prepayment fees. Look for low-fee or no-fee loans.
5. Use a debt consolidation calculator
With all of your account information listed and an idea of what your loan options are, you can use a debt consolidation calculator to estimate your monthly payments and debt settlement schedule. See how long it will take to pay off a debt consolidation loan, what your monthly payments will be, and how much you will end up spending on interest.
From there, you can decide if a debt consolidation loan is really right for you. Ideally, you want a loan that allows you to pay less interest than what you are currently paying. However, if you need to lower your monthly payment, this may not be possible. Making sure you can afford your monthly payments and are not left behind should be your first priority; after that, look to minimize the fees you are paying.
6. Apply for debt consolidation loans
Once you’ve narrowed your options to a list of lenders who offer what you need in a debt consolidation loan, start applying. You can apply with multiple lenders to compare the best rates, but you’ll want to do it in a short amount of time.
Multiple inquiries about loans in a short period of time are generally grouped together as a single inquiry on your credit report, which will minimize the potentially negative impact on your credit.
If you are unable to qualify for any debt consolidation loan, you may also consider getting a personal loan with an endorsement. This can help you qualify if your co-signer has good credit, but they will also be in trouble if they defaulted on their loan.
7. Close the loan and set up automatic monthly payments.
When you are approved for a debt consolidation loan, you will close the loan. The lender can either pay off all of your debts directly, or you can deposit the loan amount in your account, at which point you’ll want to pay off all your balances immediately. Please check back later to make sure all your account balances are at zero.
Setting up automatic monthly payments with your new loan is a great way to make sure you don’t miss any payments. Some lenders even offer discounts for setting up automatic payment.
Now that you understand the process, you can begin to find the right debt consolidation loan for your needs.