For many Americans, debt affects more than just the balance sheet.
Among 2,000 US adults surveyed about their debt, about half have felt anxious (50%), depressed (46%), or overwhelmed (44%), according to a joint survey from Achieve and Money.com. Some report sleep trouble and relationship challenges, suggesting that the consequences of excessive debt can be far-reaching.
One solution to getting out from under an unmanageable debt load: apply for a debt consolidation loan. A debt consolidation loan is used to pay off multiple existing debts and replace them with a single monthly payment.
Many consumers use personal loans for this purpose, though homeowners may also use products such as home equity lines of credit (HELOCs) or home equity loans to consolidate debt. You use the proceeds to pay off your existing balances and replace them with one monthly payment, creating a more streamlined repayment experience and a clearer path toward becoming debt-free.
Here's what lenders look for when you apply for a debt consolidation loan.
How to qualify for a debt consolidation loan
Debt consolidation loans aren't available to every borrower. Lenders generally look for signs that a borrower can comfortably manage the new loan. They typically consider factors such as credit history, debt-to-income ratio, income, and overall financial stability. These include:
1. Credit score
Lenders check credit scores and credit histories to assess a borrower's creditworthiness before approving almost any loan application, and debt consolidation loans are no exception.
Credit score requirements vary by lender, though many lenders look for borrowers with fair credit or better. In general, stronger credit profiles may improve your chances of approval and access to more favorable loan terms. A higher score unlocks better terms, namely lower interest rates. The ability to save on interest charges is often what makes a debt consolidation loan worth pursuing.
The two most popular credit-scoring models, FICO and VantageScore, use slightly different formulas. But the top-line factors considered are payment history, types and ages of credit accounts, overall credit utilization, and recent credit behavior.
How to prepare: It's difficult to overcome bad credit in a loan application. But there are responsible credit behaviors you can focus on to help manage your financial profile before applying, even if it takes time.
First, download copies of your credit report from Equifax, Experian, and TransUnion at AnnualCreditReport.com. Review each copy to ensure accuracy and promptly dispute any errors you find.
Next, settle any delinquent accounts. Going forward, focus on making on-time minimum payments to your credit accounts. Payments that are more than 30 days late may be reported to the credit bureaus, and payment history is one of the most important factors in credit scoring models. Late payments can negatively affect your score, although responsible credit behavior may help improve your score over time.
2. Debt-to-income ratio
Lenders compare your gross monthly income to your monthly debt obligations to calculate your debt-to-income (DTI) ratio. While many lenders prefer borrowers with manageable debt levels relative to their income, acceptable DTI ratios vary widely depending on the lender and the borrower's overall financial profile.
How to prepare: A high DTI ratio is the result of taking on too much debt for your income level. One common way to improve your ratio is to systematically lower one or more of your revolving debt balances to free up more of your cash flow.
3. Income and employment
A history of continuous employment is important to lenders because it signals financial stability. During the application process, lenders may request documentation to verify your income, such as pay stubs, W-2s, tax returns, or bank statements. Self-employed borrowers and gig workers may be asked to provide additional documentation to demonstrate consistent income. In general, lenders look for evidence that an applicant has sufficient income to comfortably manage the loan payments.
How to prepare: While there's no minimum income level required to get a debt consolidation loan, lenders will consider your earnings when determining your loan amount, so having stable, documented income can strengthen an application.
4. Collateral
You might have considered selling your assets, such as a car or a house, to raise cash to pay off your debt load. Instead, it may be worth applying for a secured debt consolidation loan. This involves putting an asset up as collateral for the loan. If you default, the lender reserves the right to sell the asset to pay itself back. Often, though, that risk is offset by getting a lower interest rate or a larger loan amount, provided that you have substantial equity in the asset and the ability to make full and on-time payments.
How to prepare: Keep in mind that using collateral can make the loan approval process more tedious, since the lender will need to verify the asset's ownership and value, and you may be subject to additional closing costs. You can prepare by calling lenders ahead of time to find out what's required, gathering the documents, such as the title to your car or the deed to your home, and inquiring about fees and whether it's possible to roll them into the loan balance.
Debt consolidation loan FAQs
How hard is it to get approved for a debt consolidation loan?
It's not hard to get approved for a debt consolidation loan if you have good or excellent credit and a debt-to-income ratio below 40%. It can be hard to qualify for a debt consolidation loan with a favorable interest rate if you have bad credit, high debt balances compared to your monthly income, or inconsistent income.
What credit score do I need to get approved for a debt consolidation loan?
A credit score of 600 or higher is typically needed to get approved for a debt consolidation loan, but it may not be the best option for you if you have a credit score under 670. A credit score of 740 or higher can set you up for much better terms, including a low interest rate or a larger loan amount.
Can you be denied for a debt consolidation loan?
Yes, you can be denied for a debt consolidation loan. Reasons for denial can include a low credit score (generally under 600), inconsistent income or work history, and a high debt-to-income ratio. You can improve your chances of approval by making on-time debt payments to raise your credit score or by paying down one or two debt balances to lower your DTI ratio.
