How to Get a Debt Consolidation Loan in 5 Steps

Trying to pay off your credit card balances can feel like running in place — you’re working hard, but you’re just not getting anywhere.

That’s because credit card debt is notoriously expensive. If you can only afford to make the minimum payment each month, not enough goes to the debt itself. Interest eats up your money.

Debt consolidation breaks this cycle. By rolling unsecured debts, like credit cards, into one payment with less interest, you can better chip away at the core debt until you’re officially debt-free.

A debt consolidation loan gives you access to a lump sum to pay off all your debts at once, leaving you with just one payment, and is available to borrowers with good or bad credit. These five steps explain how to get a debt consolidation loan.

» COMPARE: Best debt consolidation loans for any credit score

The first step to getting a debt consolidation loan is knowing how much money you need. Add up the debts you want to consolidate, including credit cards, store credit cards, payday loans or other high-interest debts, and keep that number in mind — that’s the loan amount you’ll want to apply for.

Also note the amount you’re currently paying toward your debts, since this will give you an idea of what monthly payment you can afford on a debt consolidation loan. For example, if you’re paying $500 each month toward your credit cards, then look for a debt consolidation loan with monthly payments of $500 or less.

Once you know the amount you need to borrow, let’s check your credit score. Borrowers with good to excellent credit scores (690 to 850 credit score) are the most likely to be approved for higher loan amounts and get a lower annual percentage rate on a debt consolidation loan. But you can still get approved for a loan even if you have bad credit (300 to 629 credit score).

You can check your credit score for free on NerdWallet or at AnnualCreditReport.com. If you’re worried about your score, NerdWallet recommends trying to build your credit before you apply for a consolidation loan.

In addition to credit score, lenders will weigh these factors:

• Credit history: Lenders like to see that you’ve used credit responsibly in the past, meaning you have a history of on-time payments, ideally spanning a couple years across two or three accounts.

• Income: Lenders prefer steady cash flow and will ask to see proof of income as part of your application. The higher your income, the more likely you may be approved, though not all lenders have a minimum income requirement. 

• Debt-to-income ratio: Lenders also look at how much of your monthly income goes toward existing debts — this figure is called your debt-to-income ratio. Most lenders prefer a DTI of 40% or less. 

• Loan details: The smaller the loan amount and the shorter the repayment term, the more likely you may be approved. That’s because small, short-term loans represent less risk for the lender. Resist the temptation to borrow more money than you need and choose the shortest repayment term in which you can still afford the monthly payment.

Debt consolidation lenders offer widely different loan amounts, interest rates and repayment terms, so it’s important to shop around before you commit to a lender. Pre-qualification is the best way to do this. It includes filling out a short, online application with each lender, after which you can view your potential rate and loan term without any harm to your credit score and then compare offers across lenders.

Online lenders, credit unions and banks all provide personal loans for debt consolidation, but online lenders are the most likely to offer pre-qualification.

As you pre-qualify, compare these features:

• Annual percentage rate: The annual percentage rate, or APR for short, represents the true cost of the loan and includes interest and any fees. The lower the APR, the more affordable the loan. For consolidation to make the most sense, you want a loan that has a lower APR than the average interest rate across your existing debts.

• Loans amounts and terms: Make sure any lender you’re considering offers flexibility in its loan amounts and terms. For example, some lenders only offer two repayment terms to choose from, while others will offer terms ranging from one to seven years. A wide range of amounts and terms helps you better customize the loan to fit your needs.

• Special perks: Some lenders offer unique features like direct payment to creditors. This means that after the loan closes, the lender will send your loan proceeds to your creditors at no extra cost, saving you that step. Other examples include a rate discount for setting up automatic payments, credit score monitoring or free financial education.

» MORE: Pre-qualify with multiple lenders for free on NerdWallet

Settled on a lender? It's time to apply for the loan. Gather the required documents such as proof of identity, proof of address and income verification. Most applications can be completed online on the lender’s website, and some lenders can approve the same day you apply.

Applying for a debt consolidation loan requires a hard credit pull. This is normal when applying for credit, but it will temporarily lower your credit score by a few points.

Once approved, read the loan document’s fine print. Look for any origination fees, which can affect the total cost of the loan, and confirm whether the lender reports on-time payments to the three main credit bureaus — Experian, Equifax and TransUnion — which can help build your credit.

If you don’t meet the lender’s requirements, you may consider adding a co-signer or co-borrower with good credit to your application. This can help you get a loan that you wouldn’t qualify for on your own.

Now that you’ve found and been approved for the loan you want, there’s one important step left.

If the lender offers direct payment, it will disburse your loan proceeds among your creditors, paying off your old debts. Check your accounts for a zero balance or call each creditor to ensure the accounts are paid off.

If the lender doesn't pay your creditors, then you’ll repay each debt with the money that’s deposited to your bank account. Do this right away to avoid additional interest on your old debts and to eliminate the temptation to spend the loan money on something else.

Finally, within about 30 days of receiving the debt consolidation loan, make your first payment.