How do you qualify for a debt consolidation loan?

Depending on the loan terms, you could save money on interest and pay off your total debt sooner with a low interest debt consolidation loan. It lets you roll multiple high-interest debts into a new loan product, preferably with a lower interest rate than you’re currently paying. But before applying, it’s best to learn what you’ll need to qualify for this type of loan to increase your approval odds.

How to qualify for a debt consolidation loan

You can get a debt consolidation loan from most banks, credit unions and online lenders. Eligibility requirements will vary by institution, but there are a few steps you can take — like checking your credit, calculating your total monthly debt and comparing lenders — to help increase your chances of approval.

1. Check your credit score

You’ll typically need a credit score of at least 700 to qualify for a debt consolidation loan with a competitive interest rate. Although a lower credit score doesn’t automatically equal a denial, as some lenders offer loans for bad credit. The annual percentage rate (APR) will likely be higher, so it’s important to shop for the best bad credit loans. If you can’t find a better APR, taking out a debt consolidation loan may not be worth it, as you won’t be able to save money on interest.

There are a few ways you can check your credit score. Some banks and credit issuers, like SoFi, allow you to view your score for free if you have an account with the company. You can also request a free copy of your credit report from all three credit bureaus on a weekly basis by visiting AnnualCreditReport.com. Although these reports won’t have your actual score, they will list out your repayment activity, negative marks and borrowing history.

2. List out your debts and payments

Create a list of all the debt accounts you plan to consolidate — include the amount you owe, the interest rate and the minimum monthly payment. Then, add all of them to know how big of a loan you’ll need to consolidate the balances.

After that, add up all of your minimum payment amounts to see how big a monthly payment on a debt consolidation loan you can afford. Once you have that down, use a loan calculator to see the terms and interest rates you’ll need to secure for the loan to serve its intended purpose.

3. Compare lenders

When comparing debt consolidation lenders, consider the APRs, fees and any other perks they offer borrowers. Also, look for consumer feedback on platforms like the CFPB’s Consumer Complaint Database, Trustpilot and the Better Business Bureau to determine if they’re reputable.

4. Apply for the loan

Gather any information and documentation the lender requires before starting the full application.  Although this varies by lender, you’ll typically need to provide the following:

• Proof of income: W-2s, 1099s, pay stubs or tax returns.
• Proof of identity: Birth certificate, driver’s license, state-issued ID, passport or another official ID.
• Proof of address: Utility bill, lease or rental agreement, bank or credit card statement or voter registration card.

Once you have your documents handy, submit the loan application. Many lenders allow you to apply online, receive a quick decision and upload the supporting documents to issue final approval. But if you’re applying with a traditional bank or credit union you may be required to visit a physical branch to apply and it could take longer to receive a lending decision.

5. Close the loan and make payments

If approved, review the loan documents, get clarity on anything you don’t understand from the lender and approve the term agreements. The lender will process the file for closing and disburse the loan proceeds to your bank account directly. However, some lenders use the funds to pay your creditors directly, if you sign up for it.

Alternatives to debt consolidation loans

After exploring your options, you may find that a debt consolidation loan isn’t an ideal solution for you. Whether it’s because you don’t qualify for a loan with attractive terms or you need to access a larger amount, there are alternatives to debt consolidation worth considering, including the following:

• Recalibrate your budget: Spot opportunities to free up cash flow and use it toward debt repayment. Some ideas include cutting down on subscription services or switching to a cheaper internet or cell phone plan.
• Use a balance transfer credit card: If you qualify for a balance transfer card with a0 percent introductory rate, you could move several credit card balances into that account to pay them off faster while saving on interest.
• Seek third-party help: If you have a significant amount of debt — $10,000 or more — consider seeking help from a credit counseling agency or debt relief company. Either could help you consolidate your debt and negotiate with your creditors to get you more favorable terms, though you may find a nonprofit credit counselor to be more cost effective than even the best debt relief company.

Whether you choose a debt consolidation loan, a balance transfer credit card or another alternative, you must avoid taking on more debt while paying off your balances for your situation to improve. To do this, you should evaluate what got you in debt. Look into establishing better spending and savings habits, and be firm about your budget.

The bottom line

If you’re considering a debt consolidation loan to get out of debt sooner and save money, weigh the advantages and disadvantages it offers before applying. You should also understand the lending process and how to manage your loan so you’ll know what to expect and can take the necessary steps to boost your approval odds.

At the end of the day, if you don’t qualify or are unsure about taking on another loan, consider all of your options. Otherwise, you could end up with a larger debt load and another monthly payment that tightens your budget even more.