If you're considering a debt consolidation loan to pay off your debts sooner and save money, it's important to weigh the pros and cons it offers before you apply for it. To get the lowest possible interest rate, you must have very good to excellent credit (usually 740 or more). A strong credit score indicates that you have a low risk for lenders because it indicates that you don't miss payments, have a low debt-to-income ratio (DTI), keep your credit utilization low (30% or less), and have a long credit history. Even if your credit isn't great, it doesn't necessarily mean you're being denied a loan.
Some lenders can accept credit scores as low as 580, although their interest rates may be higher than the debt you already have and may not be worth it. Most lenders only allow someone to borrow up to 40% of their annual gross income for a debt consolidation loan. This proposed loan amount will be added to your current debt payments, and if the new loan puts you above 40%, you may be rejected. If you have too much debt, try paying off an initial part with the debt avalanche method or the debt snowball method and reapply for the loan once some of your debt has been paid off. If they do, be prepared to provide proof of income that shows you can pay the monthly payment for the consolidation loan. In addition, a credit consolidation loan is the best option if it will save you more than major balance transfer credit cards.
Approval for a debt consolidation loan is not guaranteed, so it's helpful to understand what steps you can take if your debt consolidation loan is denied. After that, add up all the minimum payment amounts to see how large the monthly payment on a debt consolidation loan is that you can afford. Just as you must make minimum payments on other debts, such as a credit card, you will also need to make payments on a consolidation loan. Lenders like to see a credit score of at least 670 for a debt consolidation loan, but probably closer to 700, for security. One way lenders assess how well you can manage a new debt consolidation loan is by reviewing your debt-to-income ratio (DTI). To prove that you have sufficient income, you must show the lender recent pay stubs, bank statements, or tax forms (for example).
On the debt side, try to make additional payments to the principal of your debt accounts to pay off the debt faster. Unfortunately, there are also drawbacks to consider before applying for a debt consolidation loan. If your debt consolidation loan was rejected, it means that the lenders were uncomfortable with your ability to repay what you borrowed. That way, you'll know how to improve it before looking for another debt consolidation option. If you're denied a debt consolidation loan and think you'll never be able to qualify, there are other options to help you pay off your debt. These debt products come with an introductory interest-free period, usually between 12 and 24 months.
If you transfer high-interest balances to this card and settle them before the end of the promotional period, you'll save a significant amount in interest. When you need financial help and you're turned down for a debt consolidation loan, it's a sign that your financial life needs a radical change. Founded in 1976, Bankrate has a long history of helping people make smart financial decisions. We've maintained this reputation for more than four decades by demystifying the financial decision-making process and giving people confidence about what steps to take next.
