Cynthia Measom
Updated
When you find yourself in a sea of debt, owing payments to multiple creditors and paying a variety of interest rates, it might make sense to consider a debt consolidation loan to help you with debt management. A consolidation loan, such as a personal loan, gives you the funds to pay off your existing debts. Instead of making multiple payments at various interest rates, you’ll make a single monthly payment each month toward paying off the personal loan. Keep reading to find out the various options and the steps for getting a personal loan at the best possible rate.
Steps for Getting a Personal Loan for Debt Consolidation
Although many avenues exist for getting a personal loan, take the time to research the best option for your situation. Borrowers with higher credit scores qualify for better loan terms, and borrowers who have a less-than-stellar credit history will have to shop around to find the most favorable offer in terms of loan amounts, interest rates and fees.
Here are the directions for how to consolidate debt with a personal loan:
1. Check Your Credit Reports and Credit Score
Before you start looking for a loan, know your credit score. Each lender has its own credit requirements for borrowers, but all lenders will check your credit.
You should know in advance whether your credit report has any negative information. Federal law entitles you to a free copy of your credit report from each of the three main credit bureaus — Equifax, Experian and TransUnion — every 12 months, which you can order online from AnnualCreditReport.com. You can also get your credit score for free from your credit card company, bank or a free online service such as Credit Sesame or Credit Karma.
Find Out: Every Personal Loan Option for Your Credit Score
2. List Your Loan and Credit Card Balances
Include the annual percentage rates and monthly payments for each debt you owe to understand how much money you need to borrow.
3. Look for Lenders That Make Personal Loans in the Amount You Need
For example, Wells Fargo offers personal loans for debt consolidation in amounts from $3,000 to $100,000. For borrowers with excellent credit, a credit card consolidation to a single 0% APR credit card might be an option. For borrowers with good credit, the peer-to-peer lending platform Prosper offers personal loans from $2,000 to $35,000. In addition, credit unions often have lower requirements than banks for consolidation loans.
4. Shop Around for Lenders With the Most Favorable Interest Rates
Lending Club, which offers personal loan rates from 5.99% APR to 35.89% APR, lets you check your rate online with no impact to your credit score. SoFi, which offers fixed personal loan rates at 5.49% APR with autopay, also allows you to check your rate risk-free.
5. Use a Debt Consolidation Calculator
Enter the debts you want to consolidate into an online debt consolidation calculator to see how a personal loan can benefit you. Although having a single monthly payment will save you time, it’s also important to find a loan with favorable rates and terms.
6. Apply for the Best Loan for Your Situation
Once you’ve shopped around and decided on a loan, apply for it and use the funds to pay off your existing debts.
7. Don’t Rack Up Additional Debt
After you’ve paid off your debts, it might be tempting to use some of your newly available credit to make purchases. Although it’s understandable that you might want to keep your credit cards in play, it’s unwise to charge purchases you can’t easily pay off each month. Charging up your paid-off cards will land you back in a sea of debt.
8. Keep Your Old Accounts Open
Resist the urge to cIose the credit card accounts you pay off. Part of your credit score depends on the length of your credit history, so the longer you’ve had an account, the better it can be for your credit score.
Whether you need a personal loan for credit card debt consolidation or to pay off a mix of loans and credit cards, shop around for the best personal loan rates you qualify for. And remember — just because you consolidate your debt doesn’t mean you’ll pay less in the long run. Although the loan might reduce your payment, a longer term can mean you’ll pay more interest over the life of the loan.
Keep Reading: Can I Use a Personal Loan for Anything?
This article originally appeared on GOBankingRates.com: How to Get a Personal Loan for Debt Consolidation
