How do you qualify for a debt consolidation loan?

If you’re struggling with debt, a debt consolidation loan can help you get a handle on your overwhelming balances. It lets you roll multiple high-interest debts into a new loan product, preferably with a lower interest rate than you’re currently paying.

Depending on the loan terms, you could save money on interest and pay off your balances sooner. But before applying, it’s best to learn what you’ll need to qualify for this type of loan to increase your approval odds.

How to qualify for debt consolidation

Make sure to weigh the pros and cons of debt consolidation loans before you apply. If you decide it’s the right move for you, here’s how to move forward.

1. Check credit score

You’ll typically need a credit score of at least 700 to qualify for a debt consolidation loan with a competitive interest rate. Although a lower credit score doesn’t automatically equal a denial, as some lenders offer loans for bad credit, the borrowing costs will likely be higher. If that’s the case, taking out a debt consolidation loan may not be worth it, as you won’t be able to save money on interest.

There are a few ways you can check your credit score. Some lenders, like SoFi, allow you to view your score for free if you have an account with the company. You can also request a free annual copy from all three credit bureaus by visiting AnnualCreditReport.com. Although these copies won’t have your actual score, they will give you an idea of where you stand with creditors and whether you need to improve your credit before moving forward.

2. List out debts and payments

Create a list of all the debt accounts you plan to consolidate. Include the amount you owe, the interest rate and the minimum monthly payment. Then, add all of them to know how big of a loan you’ll need to consolidate the balances.

After that, add up all of your minimum payment amounts to see how big a monthly payment on a debt consolidation loan you can afford. Once you have that down, use a loan calculator to see the terms and interest rates you’ll need to secure for the loan to serve its intended purpose.

3. Compare lenders

Banks, credit unions and online lenders offer debt consolidation loans. Research several options to find the lender that’s most ideal for you. When comparing lenders, consider the annual percentage rates (APRs), fees and any other perks they offer borrowers. Also, look for consumer feedback on platforms like the CFPB’s Consumer Complaint Database and the Better Business Bureau to determine if they’re reputable.

4. Apply for loan

Gather any information and documentation the lender will need before applying to ensure timely application processing. Although this varies by lender, you’ll typically need to provide the following:

• Proof of income: W-2s, 1099s, pay stubs or tax returns.
• Proof of identity: Birth certificate, social security card, driver’s license, passport or another official ID.
• Proof of address: Utility bills, lease or rental agreements, bank or credit card statements or voter registration card.

Once you have your documents handy, submit the loan application. Some lenders allow you to apply online, receive a quick decision and upload the supporting documents to issue final approval. But if you’re applying with a traditional bank or credit union, you may be required to visit a physical branch to apply, and it could take much longer to receive a lending decision.

5. Close loan and make payments

If approved, review the loan documents, get clarity on anything you don’t understand from the lender and sign on the dotted line. The lender will process the file for closing and disburse the loan proceeds. It’s up to you to pay creditors directly unless the lender offers direct payments to streamline the consolidation process.

Alternatives to debt consolidation loans

After exploring your options, you may find that a debt consolidation loan isn’t an ideal solution for you. Whether it’s because you don’t qualify for a loan with attractive terms or you need to access a larger amount, there are alternatives worth considering, including the following:

• Recalibrate your budget. Spot opportunities to free up cash flow and use it toward debt repayment. Some ideas include cutting down on subscription services or switching to a cheaper internet or cell phone plan.
• Use a balance transfer credit card. If you qualify for a balance transfer card with a 0 percent introductory rate, you could move several credit card balances into that account to pay them off faster while saving on interest.
• Seek third-party help. If you have a significant amount of debt — $10,000 or more — and don’t know where to start, consider seeking help from a credit counseling agency or a debt relief company. Both options could help you consolidate your debt and negotiate with your creditors to get you more favorable terms.

Whether you choose a debt consolidation loan, a balance transfer credit card card or another alternative, you’ll need to avoid taking on more debt while paying off your balances for your situation to improve. You should also take a hard look at your finances to identify what got you in debt in the first place. This will help you quit unhealthy financial habits that could put your financial stability at risk in the future.

The bottom line

If you’re considering a debt consolidation loan to get out of debt sooner and save money, weigh the advantages and disadvantages it offers before applying. You should also understand the lending process and how to manage your loan so you’ll know what to expect and can take the necessary steps to boost your approval odds. But if you find that a debt consolidation loan isn’t right for you, other alternatives could be more suitable.