How To Apply for Debt Consolidation Loan in 7 Simple Steps – You’ve tried to manage your debt on your own, but it’s getting harder and harder to pay off your creditors and stay afloat financially, no matter how much you try to cut back or lower your monthly payments.
If this sounds like you, then it may be time to consider applying for a debt consolidation loan. Here’s what you need to know about this type of loan and how to apply for one in the United States in 7 easy steps.
Step 1: Know Which Type of Loan is Best for You
There are two types of consolidation loans—consolidation loans and home equity conversion mortgages (HECMs). You’ll get a better interest rate with a HECM, but it’s not available to everyone.
If you have limited cash flow, have good credit, and own your own home, then a HECM is worth looking into.
But if you don’t own your home or have poor credit, consolidation loans can work well because they offer flexibility and lower interest rates than other types of debt consolidation loans.
Step 2: Figure Out How Much You Can Afford.
When applying for a consolidation loan, lenders will look at your current income and expenses to determine how much money you can afford to pay toward your debts each month.
They’ll also take into account any extra money that might be going toward paying off debt each month (like an extra $50 per month on your car payment) as well as any assets that could be liquidated in order to pay off debts faster.
Step 3: Determine Your Eligibility For Debt Consolidation Loan.
If you’re truly eligible to apply for a debt consolidation loan, take a moment to consider how your situation will change as a result.
Will applying for debt consolidation impact your credit? What about your monthly expenses?
How might a new debt consolidation plan work into your income-to-debt ratio?
Can you handle more money going toward one single loan payment every month, and does that payment go far enough to tackle all of your creditors?
Your rate is important to look at too–some lenders charge higher interest rates than others.
Also, take note of whether or not you’ll be required to pay points (sometimes called origination fees) as well as other non-negotiable fees like an application fee or appraisal fee.
Step 4: Get Your Free Credit Report
A company that’s considering lending you money needs to know how good (or bad) your finances are. That’s where your credit score comes into play.
A credit score is a number that helps lenders predict whether you can pay them back, and will affect both how much they charge you and how many hoops they make you jump through to take out a loan.
When it comes time to apply for debt consolidation, checking your free annual credit report is an important first step.
What’s on it? Details about where and when you have open lines of credit, public records such as bankruptcy filings or unpaid parking tickets, and information about what bills you paid and when over the last few years.
Step 5: Make a Good Case For Yourself to Lenders
Lenders want to know exactly how you plan on using your loan, so give them some specifics.
This way, it’s more likely they’ll understand how their money will be put to good use. For example, instead of just saying I plan on using my loan to pay off all my credit cards, you could say:
I plan on using my loan to pay off four credit card bills that total $13,325 at a 9% interest rate.
Step 6: Find out What Happens After You Pay Off Your Debts
Once you’ve paid off all of your debts using a consolidation loan, what happens next? The answer depends on whether or not you’re able to keep making payments after paying off all of your debt.
Step 7: Get Approved and Negotiate Better Terms
An important step is to get approved and then negotiate better terms with your creditors. Before you apply, call each creditor (keep a log) and find out what their guidelines are for debt consolidation programs.
The terms may vary from one creditor to another. Most creditors want proof that you will be making a commitment to make payments on time from now on.
This means that it’s important to have good credit before applying for a debt consolidation loan or program.
It’s also important not to lose any of your current credit accounts before you start your application process; all of your accounts will be reviewed when you apply, including new accounts such as utility deposits or auto loan balances opened recently, so close no new accounts until after your application has been accepted or denied by each lender and/or collector.
