A consolidation loan can be an effective means of regaining control over runaway debt — if you go about getting it properly and handle your finances wisely afterwards. While there are a number of different ways to go about getting one, many of which are tied directly to your credit history, the basic requirements are largely the same.
Let’s take a look at what you need to qualify for a debt consolidation.
Proof of Stable Income
Regardless of the approach you take, lenders are going to want to know you have a reliable means of repaying the debt.
And yes, we said debt.
A consolidation loan does not eradicate your obligations; it simply gathers them in one “basket.” Thus, the people issuing the loan will want to be assured your income is sufficient to enable you to make the payments the loan will require — in addition to meeting the other obligations you may have.
If you work a regular job, you’ll likely be asked to provide paycheck stubs to verify your income. If you’re self-employed, you’ll be asked for tax records covering a few years of income to demonstrate the stability of your revenue stream.
A Credit History
In most cases, you’ll need a pretty strong credit history to qualify for a balance transfer or a personal consolidation loan. However, a home equity loan or a home equity line of credit can often be had with a fair credit score — because they are secured by an interest in your property.
While qualifying is easier, the downside is you’ll be trading unsecured debt from which you could walk away to secured debt, which could cost you your home if repaying the loan goes sideways. On the other hand, the interest rate is typically much lower and the repayment window is a lot wider, so payments are lower too.
The other area in which your credit history comes into play is the interest rate for which you’ll qualify. If your credit score is soft, you’re going to be asked to pay a higher interest rate. This could be more than what you’re dealing with pre-loan. Always run the numbers to be sure the deal will pencil out in your favor before settling on a strategy.
The Ability to Pay Fees
As you’re considering how to pay off debt with a consolidation loan, keep origination fees in mind. You will also encounter closing costs and appraisal fees if you go the home equity route. The other thing you’ll need if you choose a home equity instrument is — of course — equity in the property you’re pledging as collateral.
If you go with a credit card balance transfer, you’ll probably encounter an annual fee for having the card. You might also be asked to pay a fee equivalent to a certain percentage of the amount of debt you’re transferring.
Another thing to keep an eye with balance transfers is that seductive introductory rate. It’s usually only good for a limited amount of time — typically 12 to 15 months or so. At the end of that period, the interest required could escalate beyond what you’re currently paying.
One More Thing to Keep in Mind
As we mentioned above, a consolidation loan does not eradicate your obligations; it simply gathers them all together. You’ll still have to pay what you currently owe. However, what often goes overlooked is the fact that once the consolidation goes into effect, you’ll be holding an array of credit cards with zero balances.
You could easily find yourself dashed against the rocks of financial insolubility once again if you succumb to their siren songs. In other words, don’t let those “empty” credit cards suck you into charging them up again — you’ll only make a bad problem much, much worse.
Ultimately, what you’ll need to qualify for a debt consolidation will vary a bit depending upon the method you choose to pursue. However, these are the most common requirements you’ll encounter as you seek to resolve your debts with this strategy.