So you have decided that consolidation is your best bet for getting a handle on your debt. Using a personal loan could mean you will pay off high-interest debts, simplify your payments and reduce your debt more quickly. Here are five steps for getting a personal loan for debt consolidation.
Check your credit score
A bad credit score (300 to 629 on the FICO scale) may not disqualify you for all loans, but consumers with good to excellent credit scores (690 to 850 FICO) are more likely to win approval and get a low interest rate. Ideally, the new consolidation loan would have a lower rate than the combined interest rate on your current debts. A lower rate reduces the overall cost of your debt and shortens the repayment period.
List your debts and payments
Make a list of the debts you want to consolidate. This may include credit cards, store cards, payday loans and other high-rate debts. You will want your loan proceeds to cover the sum of your debts. Add up the amount you pay each month toward your debts, and check your budget for any spending adjustments you would need to make to continue repayments. Commit to a repayment plan with your budget in mind.
Compare your loan options
Online lenders, credit unions and banks all provide personal loans for debt consolidation. Online lenders cater to borrowers with all ranges of credit, although loans can be costly. Bank loans work best for those with good credit, and customers with an existing banking relationship may qualify for a rate discount. Credit unions may offer lower rates to borrowers with bad credit. You must become a member.
Apply for a loan
Lenders will ask for several documents to complete the loan process, including proof of identity, proof of address and verification of income. Make sure you read and understand the fine print of the loan, including extra fees, prepayment penalties and whether payments are reported to credit bureaus. If you don't meet requirements, consider adding a co-signer.
Close the loan and make payments
If the lender offers direct payment, it will disburse your loan proceeds among your creditors, paying off your old debts. Check your accounts for a zero balance or call each creditor to ensure the accounts are paid off. If the lender does not pay your creditors, then you will repay each debt with the money that's deposited to your bank account.
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