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Here’s How to Get a Debt Consolidation Loan

Learn how to get a debt consolidation loan that you can use to pay down high-interest debt from credit cards, medical bills, and other unsecured debts.

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Contributing Writer at Tally
July 13, 2021

American household debt hit a record $14.6 trillion in the spring of 2021. If you carry any of this debt, you are likely looking for ways to reduce your balances. You may already be familiar with some options, like a balance transfer credit card. We’re here today to discuss another possible solution: a debt consolidation loan

A debt consolidation loan essentially allows you to combine your unsecured debts — such as your credit card debt, personal loans, and medical bills — under one umbrella. Doing so can make repayment more manageable. You may receive a more favorable loan term or interest rate, and you’ll only have to worry about making one monthly payment for all the debts you’ve consolidated. 

In this article, we cover everything you need to know about how to get a debt consolidation loan. Not only do we go over what a debt consolidation loan is, but we also look at the detailed steps you should take to be approved.

Debt consolidation loan basics 

As mentioned, a debt consolidation loan is a lending solution that can help you reduce how much you owe. With a debt consolidation loan, you receive a lump-sum loan amount that you can then use to pay down other existing debt. Typically, debt consolidation solutions allow you to: 

  • Obtain lower interest rates, helping to save money in the long term.
  • Lower your monthly payments. 
  • Pay down debt faster. 

The types of debt that you can put toward a debt consolidation loan vary based on the lender. Most lenders allow you to consolidate debt that is unsecured, including debt from: 

  • Credit cards.
  • Medical bills. 
  • Personal loans. 
  • Student loans.

Unlike unsecured debt, secured debt is backed by collateral. For example, a mortgage is a secured debt, so if you fall behind on mortgage payments, the bank can repossess your home. In addition to mortgages, other examples of secured debts that don’t qualify for debt consolidation include car payments and home equity lines of credit (HELOCs). 

The advantages and disadvantages of debt consolidation loans 

Before we dive into how to get a debt consolidation loan, it’s important to understand whether it’s right for you. Below are some of the advantages and disadvantages associated with these loans. 

Advantages of debt consolidation loans 

Debt consolidation loans are useful because they could allow you to pay down debt faster. Most loan options have a defined beginning and end for the loan repayment, so you’ll know exactly how much you’ll need to pay by each month’s due date and how long it will take to pay it off. This could also be useful for budgeting, since you’ll know the exact amount of your debt payment each month. 

These loans also tend to offer lower interest rates. For instance, while the average credit card interest rate is around 16%, debt consolidation loans for people with excellent credit offer interest rates as low as 6%. And, this interest does not compound, which means you’re not accruing interest on top of interest. 

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Lastly, a debt consolidation loan may help you boost your credit score. Your credit report will take a small hit when you open your new loan, since your lender is going to have to check your credit history, as they do with all borrowers. But after this initial dip, you should quickly begin building good credit by sticking to your loan’s repayment plan

Disadvantages of debt consolidation loans 

Debt consolidation loans can be a great option to get out of high-interest debt, but they do have some downsides that are worth considering. 

For one, they are not an overnight fix. You will need to work hard to ensure you make your loan payments on time. Otherwise, you could end up back in debt. You will need to stick to your budget and debt management plan for a consolidation loan to be effective. Late payments lead to penalties. Though they can’t change your loan rate, lenders can charge late fees in the ballpark of $40 per missed payment.

Second, there may be some upfront costs that you need to consider. These depend on your lender but can include: 

  • Annual fees.
  • Closing costs.
  • Balance transfer fees. 
  • Loan origination fees. 

Some lenders also charge prepayment penalties if you pay down the loan before the end of the loan term. This means that you must pay interest on the loan, even though you may have the financial means to pay down the loan. If your loan does include a prepayment penalty, It might be worthwhile to calculate how much it would be if you are thinking of paying the loan off early. Paying whichever is less, the penalty (however the lender calculates it) or the remaining interest payments.  

Lastly, your credit score will determine your interest rate. If you have bad credit, there’s a strong chance that you are going to have a higher interest rate than someone with excellent credit. If you do not have good credit, then you’ll want to make sure that the interest rate of your debt consolidation loan is better than what you’re paying on your outstanding debts. 

How to get a debt consolidation loan 

How to get a debt consolidation loan: A woman uses a calculator to add up her bills

Now that you’ve put some thought into whether a debt consolidation loan is right for you, let’s take a closer look at the steps you need to take to secure one. 

1. Know your credit score 

The first step in securing a debt consolidation loan is to know your credit score. Your credit score is going to heavily influence your consolidation options and repayment terms. You can check your FICO and VantageScores online

2. Understand what debts you want to consolidate 

To give you a proper loan offer, your lender is going to need to know what debts you intend to consolidate. Take a look at your outstanding debts and evaluate your payment history, figuring out how much you pay each month toward debt. 

3. Evaluate your loan options 

Now that you better understand your financial situation, you can begin shopping for low-interest debt consolidation loans. Online lenders offer consolidation loans that cater to those with all ranges of credit. You can pre-qualify so that you can better understand what your rates will be before a lender runs a hard inquiry on your credit report

​Bank loans offer another lending option, though they are often reserved for those with good credit. You can also look at credit unions, which offer unsecured loans for those with bad credit. However, you may need to become a member of the credit union to gain access to these loans. 

4. Apply for the loan 

After choosing your intended lender, you can apply for the loan. You will need to provide information like proof of identity, address, and income verification. Be sure to read the fine print of your loan agreement. 

5. Start making payments and find debt relief 

Once you’re approved for the loan, it’s time for you to start paying off debt. There are typically two options for using the loan. Some lenders offer a direct single payment or “autopay,” meaning they will automatically disburse funds to your creditors to pay off existing debts. Once they do so, you should check to ensure you have a zero balance on these accounts. 

The other option is for lenders to deposit money into your bank account, at which point you are responsible for paying off your debts. This is risky, as it can be tempting to use the funds for something other than paying down debt. It’s up to you to be fiscally responsible and to use the funds properly. 

What to do if you can’t get a debt consolidation loan 

Debt consolidation loans are an excellent option to help reduce how much you owe. But, it is one of multiple such options available, including balance transfers and debt settlement

One other option you may want to consider is Tally. Tally is an automated credit card payoff app that pays down your debts in the quickest, most efficient way possible. Tally automatically makes your minimum monthly payments, helping to prevent late fees.

Use a debt consolidation loan to get out of debt 

A couple celebrates being debt-free while sitting on their couch

If you’re looking to get out of debt, you may want to look into a debt consolidation loan. A debt consolidation loan can help you pay down your unsecured debts at a lower interest rate than what you’re currently paying. 

There are a few steps you need to take when securing a debt consolidation loan. Start by evaluating your personal finances and credit situation. Then, you can move into discussions with lenders to find the best loan for you. 

If you determine that a debt consolidation loan is not right for you, you may want to look into Tally instead. Tally is a credit card payoff app that automatically pays down your debts in the most efficient way possible.