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Do I Qualify for a Debt Consolidation Loan?

Claire Matthews

Financial Advisor, MoneyBeagle

Do I Qualify for a Debt Consolidation Loan?

Are you overwhelmed with debt and struggling to find a way out? If so, then you may be considering a debt consolidation loan. If most of your debt is due to credit cards or other debts with high interest rates, a debt consolidation loan may be a good option to consider. There are many types of debt reduction and debt management services available, and it can become confusing to determine the right path toward eliminating your debt.

What is a Debt Consolidation Loan?

A debt consolidation loan is a good option to consider for managing your debt. It can lower the interest rate you are paying and it allows you to combine multiple payments in a single monthly payment. It is important to make sure you can afford the monthly payments before signing any loan agreement.

The concept of a debt consolidation loan is fairly simple. You receive a loan which you use to pay off your multiple high interest debts, and then make one monthly payment to the lender. If you get a loan with a low interest rate, this can save you money in interest over time, and it can eliminate multiple monthly payments to multiple lenders. There are disadvantages to consider with a debt consolidation loan as well.

Some debt consolidation loans may require you to stop paying on your accounts or to close them altogether. Either case will cause a dip in your credit score. This type of loan is only beneficial if you get a lower interest rate than what you currently paying on your credit card or other debts.

You should also consider how long it will take you to repay the debt consolidation loan in full. The longer the loan term, the longer it will take to pay off and the more interest you will end up paying. In order to successfully overcome your debt, you should stop using any credit cards or lines of credit. To eliminate your debt, you have to stop accumulating it.

What are the Eligibility Requirements for a Debt Consolidation Loan?

Before you look into applying for a debt consolidation loan, be sure to choose a reputable lender who has a proven track record of success. Many legitimate lenders are licensed or accredited by the Better Business Bureau (BBB), so be sure to check their ratings and history. A legitimate online lender will not force you to provide any additional information before offering details of their debt consolidation loans, including loan amounts and interest rates.

Credit Score

The first thing most lenders look at is your credit score, although if you have a low score, it doesn’t necessarily mean you won’t be approved, but you may have to do a little more work to find the right lender for you. Some lenders have a specific minimum credit score you must meet in order to qualify, which can range anywhere between 640 and 700. A credit score tends to reflect the amount of risk the lender will be assuming if they loan you the money.

There are some lenders who consider applicants with low credit scores, but be prepared to pay a higher interest rate. Debt consolidation loans come with an annual percentage rate (APR) that may range from 5% to 36%, so be sure to pay attention to the details of the loan agreement. In addition, you may be charged a loan fee between 1% and 5% of the loan amount.

If your credit score is extremely low, you may want to make an effort to increase it so you can be approved for a debt consolidation loan. Cutting back on expenses and paying more toward your debt may raise your credit score enough to make you eligible. If you have debts that are past-due or in default, you may have difficulty finding a debt consolidation lender, although not in all cases. Some lenders will accept applicants with low credit scores if they have a significant income and a steady job and employment history.

Debt Consolidation Loan Amounts and Loan Terms

Most lenders have established minimum and maximum debt consolidation loan amounts. If you do not have more than $1,000 in debt, you probably won’t qualify for a loan – but then, you probably wouldn’t need one if your debt was less than that. If your debt exceeds a certain amount, you may also be disqualified, although some lenders allow anywhere from $35,000 to $100,000 as the maximum loan amounts. Remember, though, that the more you borrow, the more you will be paying back in interest.

Similarly, the longer the loan repayment term, the more you will be paying back in interest, in addition to the loan amount and loan fees. The benefit of a longer loan term is a lower monthly payment, so you will have to balance the two.  You need to make sure you can afford the monthly loan payments, but if you need a long repayment term, you may not qualify for a loan.

What if I Don’t Qualify?

If you are denied a debt consolidation loan, ask the lender to explain why and how you can improve on those factors. If you take some time to reduce some of your debt on your own to raise your credit score, you may be eligible, but you need to know your specific financial situation and what you can do to improve your credit report.

There are other options to explore that can also help you reduce or eliminate your debt if you don’t qualify for a debt consolidation loan.

Reduce Debt Without a Loan

Although you will have to make some sacrifices, it is possible to reduce your debt without using a loan or any other assistance. It will take some time, but you can make a significant dent in your overall debt by reducing your expenses or increasing your income. In order to be successful on your own, you will have to document your expenses and your debts.

The debts with the highest interest rates should be the first debts you pay off. Rank your debts by interest rates, and document your monthly payments as well. Then, make a list of your expenses, and highlight the ones that can be reduced, such as food, gas or entertainment. Make a reasonable estimate of how much you can cut back from each expense, and make the decision to use that extra money to make additional payments toward your debt.

For example, you can reduce your grocery bill by clipping coupons, buying off-brand and planning your purchases based on store sales. You may be able to reduce your gas expenses by carpooling, walking or riding a bike to work or to run errands. Perhaps you can avoid going out to the movie theater or cut out other entertainment or vacation expenses as well. It is up to you to determine what sacrifices you are will to make to become debt-free.

You will have to make sacrifices, but they won’t be forever. Eventually, you will qualify for a debt consolidation loan, because paying off some of your debt will increase your credit score.You will also have a lower debt amount, which may increase your chances of being approved for a loan. You may even decide that you can do it on your own, without the assistance of a loan.

Negotiate with Your Creditors on Your Own

You are within your rights to contact your creditors on your own to negotiate the terms of your account to try to reduce your payoff balance or your APR, or both. If you have been steadily paying down your account balance, they may be willing to negotiate.  Reducing your balance or your interest rate can end up saving you hundreds or thousands of dollars in the payoff balance and interest rate charges. If your accounts are in collections, they may be even more willing to negotiate a deal.

Debt settlement organizations will negotiate with creditors on your behalf, but they tend to have stipulations associated with their services. They will charge you a fee for their negotiations, and in some cases, you may have to default on your accounts which can damage your credit score. Another disadvantage to debt settlement is that any amount you reduce your balance in negotiations may have to be claimed as income, so you will have to pay taxes on it.

Balance Transfers

You may have received balance transfer offers in the mail or in your inbox. This is a credit account that allows you to transfer your balances from all other credit cards into one. A balance transfer should be approached with caution though, because you can end up paying the same amount you would have without the transfer, and sometimes more.

Although many credit card companies offer 0% introductory periods, they also charge you a fee between 2 to 5% of the total amount you transfer. This is how you can end up paying more than your initial debt if you consolidate your credit cards into one with a balance transfer. When the introductory period expires, the APR may be up to 25%. If you make one late payment, it may increase even more.

Balance transfers are typically only beneficial if you have a relatively low total balance that you can pay of or reduce significantly before the 0% introductory period expires.

Bankruptcy

A bankruptcy should only be considered as a last resort to overcome your debt, although for some people, it is the best option. If you are constantly receiving calls from your creditors or collection agencies or your wages have been garnished, then bankruptcy may be a good option to consider. If you have a low income and extremely high debt, you will most likely be a good candidate for bankruptcy. This option will eliminate all your debts and allow you to have a fresh financial start, which can be a relief in many cases.

A bankruptcy will damage your credit score, and you may have to surrender some assets, depending on your situation. You won’t have to surrender any assets that are deemed necessities, but there is some flexibility in most cases. Since bankruptcy is a court proceeding, it is a matter of public record. Your employer or anyone who checks your credit report will see you have a bankruptcy on your record.

If you think a bankruptcy may be the right choice for you, you should do some research on the specific requirements of your state. This can be a long process, and you may need to seek the assistance of a lawyer or a credit counselor before you proceed.

Find the Best Option for You

There are many options online for debt consolidation loans. If you have bad credit, you shouldn’t be discouraged, because there are lenders who will consider offering you a debt consolidation loan. Once you find a few reputable lenders, you should compare the loan details, terms, interest rates and fees so you can find the best deal available. Remember, a debt consolidation loan will only work if you have a lower interest rate than you are currently being charged, and if you can afford the monthly payments.

Defaulting on a debt consolidation loan can not only damage your finances significantly, but it can cause lawsuits or court proceedings against you. You want to avoid this at all costs. If you default on a debt consolidation loan and have to go to court, you will not only be responsible for the loan amount, but also attorney fees and other court costs.

While a debt consolidation loan can be a great way to reduce your debt, you should be aware of the details before you sign the loan agreement. Taking the time to research lenders and compare consolidation loans can save you a significant amount of money over time. Regardless of your specific financial situation, you do have options to reduce or eliminate your debt, it’s just a matter of finding the best option for yourself.

Claire Matthews

Claire Matthews

Financial Advisor, MoneyBeagle

Claire is a noted financial writer and author of hundreds of articles about personal and business finance. Before getting her MBA, she graduated with a BS in Economics. Her coursework focused on the different ways that debt, debt structure, and debt restructuring affect micro and macro-economic issues.

Upon graduation, she took a job at an investment bank that worked with municipal and county governments to help them reorganize and structure their debt so they could continue to provide essential city services.

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