Do I Qualify for a Debt Consolidation Loan?

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If I’m being completely honest, I really like it when things are spelled out for me. I’m all about those infographics that are packed with stand out stats. I’ll watch a YouTube video to learn how to properly use my electric toothbrush (seriously). I’m more than happy to sit through tutorials. In other words, I’m excited when there are resources available that distill confusing information into concise and easy to understand basics.

Unfortunately, for people interested in getting a debt consolidation, there are very few trustworthy resources available. In particular, when trying to figure out if you qualify for a debt consolidation loan, it can be hard to get a straight answer. With the confusion between debt settlement and debt consolidation, things get even more murky. Thus, I wanted write a blog post that sussed out the details of what you can expect as you consider undergoing the initial application for a debt consolidation loan.

First thing’s first…why would someone consolidate their debt?

If you’re focused on paying off your debt (and in a position to avoid taking on more debt) you may consider consolidation your higher interest debt into one single loan which generally has a lower interest rate. This can help you pay off your debt faster. With a lowered interest rate, you avoid tacking on to the life and sum of your debt and also cut down on the time spent paying your loan.

While debt consolidation isn’t the best option for everyone, if you’re interested in understanding whether or not you might qualify for a lowered interest rate then you’ll want to address a few questions. Here are the need to-knows as you begin exploring:

What are the criteria used by lenders?

Lending requirements differ from company to company, but there are a few factors that are usually included in a lender’s assessment:

Credit score thresholds
For the most part, lenders want to see a fairly high credit score. This doesn’t mean you need a “perfect” score (and in fact, there is no such thing) but most debt consolidation lenders will require you to meet a certain credit threshold. A credit threshold is the range between a certain set of scores which are then used to qualify “creditworthiness.” For example, you might see your credit score ranked as “Average”, “Good”, or “Excellent” depending on which range it falls within. Essentially, lender’s use these ratings to assess the potential risk of a borrower. The higher the credit score, the lower the risk.

When considering whether to grant a loan, peer-to-peer lenders such as Prosper and Lending Club will look to see that you have a credit score above a certain number: For example:

— Prosper requires a credit score of 640 or higher
— Lending Club requires a credit score of 660 or higher

This gives them a baseline to use when determining whether someone fits within the credit criteria for a specific debt consolidation loan. If your score falls below these scores, they will likely reject your application. If this is the case, you may have to raise your credit score before you can qualify for a loan. For more information on how to do this, check out a few ways to boost credit without taking on more debt.

Credit history
On top of your credit score, lenders may also take a look at your credit history. This information is generally used by lenders to get a gauge of a borrower’s financial layout, whether or not they’ve defaulted on a loan, and payment history.

Total loan amount
Many debt consolidation companies have a minimum and a maximum for the amount of debt they will consolidate. For instance, they may not consolidate debt if the total sum is less than $1,500. Similarly, they may not consolidate debt that exceeds a certain number. If the total debt you attempt to consolidate is too low or too high, your application may not be considered.

Income
A lender will also look at your overall financial stability. This might include annual salary, length of current employment, and employment history. Be prepared to show proof of employment, pay stubs, and rental history.

Timeline of repayment
The length of the repayment plan may be another consideration as a lender looks at an applicant. Some consolidation loans are based on the premise that they’ll be paid back on an accelerated repayment plan. If a borrower plans to stretch out their repayment, that might be a blocking factor.

What will a debt consolidation loan look like?

Taking all above factors into consideration, your lender will create a single loan with an interest rate based on your financial circumstances. For an idea of what a debt consolidation loan might look like for you, you can check out Bankrate’s online calculator.

*Note, this is not a guarantee of what kind of debt consolidation loan you will be eligible for. This is only a tool used to estimate what kind of consolidation you may obtain if you meet all other criteria.

Get offers for lower-interest rate debt consolidation loans here on ReadyForZero!
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What if I don’t qualify for a debt consolidation loan?

Despite the fact that many people are burdened with high interest rates that make the repayment process long and difficult, it’s still difficult for many people to obtain a debt consolidation loan. If the criteria above aren’t met with at least some satisfaction by the lender, an application may be rejected.

If you are rejected for a debt consolidation loan, ask the lender to explain the reasons behind their decisions. It might be something as simple as a low credit score but there may be another reason that is specific to your specific circumstances. This information can give you insight useful for future applications.

How can you find a reputable debt consolidation company?

The internet is a scary rabbit hole of info. Do a quick Google search and you’ll bring up a large number of results. That being said, not all debt consolidation companies are legitimate. Be wary of any company that you don’t trust. Put in the time to research a company before sending over any personal information. Locate and call contact numbers to get a feel for both the level of customer service. If you like, we have a debt consolidation app you can use to find offers from trustworthy lenders. Additionally, read up on red flags to ensure you are working with a reputable company.

Will debt consolidation fix the situation?

While debt consolidation is a useful option for some, it’s important to remember that it isn’t the final answer to all your financial challenges. Lowered interest rates can save you money and shave time off the life of your loan, but perhaps of more importance is that you continue to take the pulse of any repayment plan. Check-in with the status of your debt(s), regularly explore your options, and above all maintain communication with your lenders if you’re facing financial hardship.

Image Credit: Michael Coghlan

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