How To Get a Debt Consolidation Loan in 6 Steps

If your 2025 to-do list includes slashing your list of creditors and the various interest rates you pay them, invest a few minutes in how to get a debt consolidation loan.

Instead of tracking down and juggling a handful of payments each month, you'll make only one, and if the convenience and simplicity of a debt consolidation won't win you over, the math likely will.

Your actual debt consolidation loan rate could be higher or lower based on factors such as your credit score and debt-to-income ratio. Use an online loan calculator to enter different loan amounts, interest rates, and terms to estimate your savings.

How does debt consolidation work?

Debt consolidation works by combining multiple debts into a single loan with a potentially lower interest rate. Instead of managing several monthly payments with different due dates and interest rates, you make one payment to a single lender. This can simplify financial management and reduce overall interest costs.

Once you determine your total debt, you apply for a debt consolidation loan. If approved, you can use the funds from the new loan to pay off existing debts, streamlining your repayment process and potentially saving money in the long run.

Types of debt consolidation loans

Just as there are different kinds of debt, there are different kinds of debt consolidation loans. Debt consolidation loans backed by collateral are known as secured loans. Debt consolidation loans that don't require collateral are unsecured loans.

Because unsecured loans do not require any form of security from borrowers, they are riskier for lenders due to higher default rates and the lack of collateral to recover losses. As a result, lenders typically offset this risk by charging higher interest rates.

It's a trade-off. A secured loan ties you to your collateral for which you will likely receive a lower rate. An unsecured loan literally comes with few attachments. For that added freedom and flexibility, your lender will likely charge you a higher interest rate. If paying less in interest is your primary concern, then a secured debt consolidation loan might make more sense.

Popular secured loans include:

• Home equity loans
• Home equity lines of credit
• Cash-out refinances
• Reverse mortgages
• Reverse mortgage lines of credit

Steps to qualify for a debt consolidation loan

Step 1: Review your credit report and score

To assess your eligibility, start by reviewing your credit report from all three major credit bureaus: Equifax, Experian, and TransUnion. Although they draw from the same well of information, the reports may differ.

This happens for different reasons. For example, a company whose product or service you've purchased on credit may not always report the transaction to all three credit agencies. And although the three major credit bureaus generate their own unique credit reports and credit scores, only the Fair Isaac Corporation (FICO) produces actual FICO scores.

While FICO produces a base FICO score, it also generates many spin-offs. For example, FICO produces industry-specific versions for auto and bankcard risk assessment. In addition, FICO is constantly bringing new versions to the market.

You can request free reports from AnnualCreditReport.com. Check for errors and dispute any inaccuracies. You can access one version, the FICO Score 8, for free as well. This free offer of a FICO Score also includes free Equifax credit monitoring and a free Equifax credit report every month. No credit card is required.

Step 2: Compile debts and payments

Before getting a debt consolidation loan, try calling your creditors directly to negotiate a lower interest rate or other solution. Any payment or interest rate reduction you're able to negotiate is potentially less money you need to borrow as part of a debt consolidation loan.

"It's something you can easily and successfully do on your own," says Todd Christensen, a financial education manager for Debt Reduction Services, a nonprofit credit counseling agency.

If that seems too stressful, a credit counseling organization can make the calls for you. A credit counseling agency can also create an actionable plan for you to tackle your debt. Setup fees may range between $25 and $50; monthly fees typically range from $30 to $70. To find a nonprofit credit counselor in your area, consult either the Financial Counseling Association of America or the National Foundation for Credit Counseling.

"Credit counseling organizations typically have relationships with all major credit card agencies and local lenders, so that's a big advantage," notes Christensen. "Working with a credit counseling agency also doesn't get reported to FICO or affect your FICO score."

Step 3. Determine your effective APR across all debts

A credit counseling agency can also help you determine your effective APR, or you can easily do it yourself.

The simplest way to approach such a task is to use an average APR calculator. Populate the fields provided with principal balances, annual interest rates, and the most recent interest charges, then calculate the results. You'll see a breakdown of your total principal owed, your total interest costs per month, and the average interest rate you're paying across all your debts.

Step 4: Determine your debt-to-income ratio

Debt-to-income ratio (DTI) is a simple calculation that shows how much of your income goes towards debt payment. Although the number doesn't show up on your credit report, lenders use it, along with your credit score, as a key factor in their loan approval decisions. A higher number can suggest you're a greater loan risk to the lender; a lower number may indicate you're a good risk.

To calculate your DTI, combine all your monthly debt payments (the minimum amounts due) and divide the sum by your gross monthly income.

Say, you pay $2,500 a month for a mortgage, plus $500 for an auto loan, and $500 in monthly credit card debt for a monthly total of $3,500. If your gross monthly income is $8,000, your DTI would be 43.75% ($3,500 / $8,000 = 0.4375)

A DTI of 43.75% would be considered high by most lenders standards. Paying off just one credit card may bring your debt down into the desired range. Working with your lender may provide other solutions.

Step 5: Compare several lenders

Shop around with banks, credit unions, and online lenders. Compare APR, loan terms, fees, and discounts to secure the best deal. Fortunately, APRs are a great comparison tool as they capture the true costs (fees and upfront interest) of the loan.

You can usually prequalify with most lenders via a short questionnaire and soft credit check. Prequalification is free and won't hurt your credit score. But once you formally apply for a loan, most lenders will conduct a hard credit check which could ding your score by up to five points for a year.

Step 6: Submit your application

Once you find a lender that looks like a good fit, formally apply. Be ready with pay stubs, bank statements, tax returns and other personal or financial documentation to support your loan application.

This is the stage your lender typically conducts a hard credit check, which may lower your credit score. Conversely, if you use your debt consolidation loan to pay off credit cards, your score could rise, based on an improved credit utilization ratio, which makes up the second largest (30%) portion of your FICO score.

Step 7: Sign the offer and begin repayments

As eager as you may be to sign your loan agreement and start reaping your loan consolidation savings, don't be in such a rush. Read your contract carefully. Double-check every detail of your contract for accuracy and confirmation of terms and conditions. If everything looks good, sign. Your lender may wire funds to your account or your creditors the same day.

How to evaluate loan offers

Compare debt consolidation loans considering these key factors:

• Annual percentage rate (APR): The APR encompasses both the interest rate and any associated fees, providing a comprehensive view of the loan's total cost. Comparing APRs across different offers helps identify the most cost-effective option.
• Loan term: The length of the loan affects your monthly payment and the total interest paid over time. Shorter terms typically have higher monthly payments but result in less interest paid overall, while longer terms offer lower monthly payments but increase the total interest cost.
• Monthly payment amount: Ensure the monthly payment fits comfortably within your budget. Though a longer term generally means higher interest costs, it also means a lower payment, which could save you from late payment and fees or credit damage.
• Origination fees: An origination fee is deducted upfront from the loan amount, which reduces the funds available to pay your creditors. This means you'll need to borrow more than the total amount of your current debt to cover the cost of the origination fee.
• Total repayment amount: Calculate the total amount you will repay over the life of the loan, including principal and interest. This figure provides a clear picture of the loan's long-term cost.

Tips for negotiating better terms with lenders

Securing favorable terms on your debt consolidation loan can lead to significant savings. Consider the following strategies when negotiating with lenders:

• Improve your credit score: A higher credit score often qualifies you for lower rates. Before applying, improve your credit by paying down existing debts and correcting any errors on your credit report.
• Shop around: Don't settle for the first offer you receive. Compare loan terms from multiple lenders, including banks, credit unions, and online lenders, to find the most favorable terms.
• Negotiate interest rates and fees: Don't hesitate to ask lenders to lower interest rates or waive certain fees. Demonstrating that you've received better offers elsewhere can provide leverage.
• Consider a co-signer: If your credit isn't strong, having a cosigner or a co-borrower with good credit can help you secure more favorable loan terms.

Alternatives

If you don't qualify for a debt consolidation loan or you just don't like the interest rate being quoted, you have other debt management alternatives.

Debt negotiation

Pick up the phone, explain your situation to your creditors, and ask for some form of credit relief, which could result in a lower interest rate or a temporary suspension of payments to help you bounce back from a temporary hardship.

Debt management plan

Elect to work with a credit counseling or debt management agency. If possible, work with a nonprofit that is a member of the Financial Counseling Association of America or the National Foundation of America. They can call your creditors directly or develop a suitable debt management plan on your behalf. States regulate their fees.

Balance transfer credit card

A 0% APR balance transfer to a credit card acts like a short-term debt consolidation loan. It's short-term because the maximum term for a balance transfer is typically 21 months. After the term expires, your interest rate adjusts to the card's standard rate, which could be around 30%.

Family loans

A family loan could be a low-interest alternative to a commercial unsecured loan, especially if you have fair or bad credit. But it's important to establish a clear agreement regarding the loan's terms and repayment to protect family relationships and stay out of trouble with the IRS.

Be aware there are IRS rules regulating these loans, especially when they exceed $10,000.

401(k) loans

You could borrow from your employer-sponsored 401(k) plan via a 401(k) loan. Temporarily taking money out of your account, however, reduces the amount of time your money has to compound and grow tax-deferred. Plus, if you don't repay it, you could face severe tax and early withdrawal penalties.

You can generally borrow up to 50% or $50,000 of your vested account balance, whichever is less. If 50% of your vested balance is less than $10,000, you may be able to borrow up to $10,000, depending on your plan.

Mortgage loans

Home equity loans, home equity lines of credit (HELOCs), cash-out refinances, and reverse mortgages (for people 62 or older) may all provide the money you need to consolidate debt, ideally at an interest rate less than what you're paying now. In each case, your home serves as the collateral for the loan. Typically, the interest rate is lower than the interest rate on an unsecured debt consolidation loan, but if your payment falls in arrears, you could lose your home.