requirements for debt consolidation

How to Qualify for a Debt Consolidation Loan

Looking for a debt consolidation loan to help you streamline your debt? Congratulations on taking the first step toward a debt-free life. But what will you need if you want to qualify for the loan? Read on to find out what lenders will consider when evaluating your application.

Let’s start with the basics: what is a debt consolidation loan?

What is a debt consolidation loan?

A debt consolidation loan is a loan that you use to combine two or more debts into a single payment. The goal is usually to secure lower monthly payments, to reduce the overall cost, or just to simplify your budget.

To consolidate your debts, use the money from your debt consolidation loan to pay off your other credit card debt, personal loans, etc.

From then on, instead of making several different payments (each with their own interest rates and terms), you’ll make a single streamlined payment to your debt consolidation lender. Interest rates on these loans are typically fixed, making for uncomplicated and consistent monthly payments.

How do you qualify for a debt consolidation loan?

When evaluating your application, lenders will examine the following:

Your income

First, your creditor will want to know if you’re capable of paying back the loan. They’ll probably ask for a pay stub as proof of your income, confirming that you have a stable enough job to cover your payments. Most lenders will require a certain debt to income ratio, and that your monthly disposable income is 10-15% of your gross income.

Your payment record

Next, the lender will want to know your payment history. Are your monthly payments typically on time, or late? Even a few late payments on your record can increase your interest rate considerably. And if you have a long history of failing to pay your bills, you may not qualify for the loan.

Your “overall stability”

This rather nebulous category applies to more than just your income. The lender will want to know if you’ve lived in the same place for more than two years, or if you move around a lot. They may also ask how long you’ve worked for your current employer. The more consistent your professional and residential history, the more reliable you’ll look as a borrower.

Your home equity

Lenders are reluctant to loan large sums of money to borrowers without collateral. Many require you to have a respectable amount of home equity in order to qualify for a debt consolidation loan. As a general guideline, if you have $60,000 of home equity, you can typically consolidate up to $50,000 of debt.

If you don’t own a home, you can still get a debt consolidation loan — it will just be a smaller sum, and with a less competitive APR.

When shouldn’t you consolidate your debt?

If your credit is low and you don’t own your own home, you may not be able to qualify for competitive rates and terms on a personal loan. If the APR of your debt consolidation loan is higher on average than the interest rates of your outstanding debts, consolidation is a bad idea. Even though the payments will be more streamlined, they’ll cost you a lot more in the long run. Bide your time and improve your credit through responsible repayment behavior, and then try again later.

How to get started

Whatever your situation, the first step is to do your research. The best way to find a good deal is to compare multiple loan offerings from multiple lenders.

Not sure how to start? Find out what kind of terms you qualify for with SuperMoney’s personal loan engine. It’s fast and easy, and prequalifying for loans won’t hurt your credit score!