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Consolidation Loans Checklist: Find the Right Loan For Your Debt

Jan 06, 2023

Consolidation loans are sometimes perceived as a last resort for people who don't practice responsible spending habits. Truth be told, that's not entirely accurate. People who actively stay on top of their finances also benefit from consolidation loans. Who would pass up an opportunity to receive a lower rate, save money, or get out of debt faster?

Some young adults new to credit cards and consumer loans may not have the budgeting experience to set accurate spending limits and may get overwhelmed. Others may experience financial setbacks such as illness or job loss, which cause expenses to nearly outweigh their paycheck. No matter your situation, anyone could benefit from consolidation loans.

It’s important to carefully consider whether consolidation loans are suitable for your financial situation. And if so, you should explore the critical next steps involved in understanding the process and determining the best consolidation loan to achieve your financial goals.

Understand How Consolidation Loans Work


The majority of consolidation loans are fixed-rate products that offer borrowers a static monthly payment. The lump sum disbursement is used to pay off credit card balances, high-interest loans, and other types of debt. Examples of these include home equity loans and personal loans.

Rather than writing checks or making electronic payments for multiple loans each month, you're left with a single loan payment. This way, consolidation loans streamline your finances, reduce the amount of money you pay towards debt each month, and usually save you money on interest and fees. In some cases, you can even shorten your repayment period.

Decide if a Consolidation Loan Can Help


Consolidation loans prove viable solutions for many people with strained finances. But that doesn't necessarily mean they're the go-to option in every scenario. Before applying for a home equity loan, personal loan, or low rate credit card, conduct some due diligence to determine if consolidating multiple loans and credit card balances is right for you. Here are some scenarios where a consolidation loan may benefit your finances.


  • You're carrying balances on several high-interest credit cards.
  • You're paying too many bills each month and tend to forget a payment.
  • You're only making the minimum payments each month.
  • Paying back taxes is straining your finances.
  • Little money is left for savings or leisure spending after paying bills.

Because consolidation loans can be used to pay off credit cards, taxes, medical costs, and even utility bills, they reduce outgoing revenue. Paying one manageable fixed-rate monthly payment frees up money to pay down the principal faster, increase savings, and even improve your quality of life.



Reveal tips to get out of debt fast while exposing unrealistic expectations by downloading our guide:

Debt Consolidation: Expectations vs. Reality



Review Consolidation Loan Options


There are several consolidation loan options for qualified borrowers to consider. Each provides borrowers with specific benefits that may be a good fit for their unique financial situation. There are also reasons certain consolidation loans may not necessarily effectively achieve long-term financial goals. These rank among the popular consolidation loan options.


Home Equity Loan as a Consolidation Loan

A home equity loan is essentially a second mortgage that leverages the difference between what is owed on the initial mortgage and the home's current fair market value. Because home equity loans are lump sums secured by property, qualified borrowers generally enjoy access to low-interest options. In terms of lowering the amount of your hard-earned money spent on accruing interest and fees, home equity loans used for debt consolidation rank among the preferred choices.

Property with viable equity may also qualify for a flexible home equity line of credit or HELOC. This option also uses home equity as collateral. The key difference between a HELOC and a traditional home equity loan is that the HELOC doesn't involve a lump sum. Instead, borrowers can draw on the available funds to use when needed, similar to how one would use a credit card. After paying off the debt, borrowers make payments on only the portion that was used.

Although consolidation loans usually help reduce some of the financial strain, not everyone is comfortable using their home as collateral to achieve financial independence.

Personal Loan for Debt Consolidation

Personal loans can be used for a wide variety of purposes, which makes them a great debt consolidation option. Lenders generally don't require collateral to back up the lump sum disbursement, unlike home equity loans. Of course, borrowers are obligated to make on-time monthly installments even though specific assets are not necessarily part of the written contract.

Although people may feel more comfortable with unsecured loan products, they rarely come with the rates associated with home equity and other asset-secured options. Credit scores, repayment histories, and debt-to-income ratios largely determine the interest rates of these types of consolidation loans.

Credit Card Options for Bill Consolidation

The notion of paying off debilitating credit card debt by taking out another credit card account may seem counterintuitive. But not every lender attaches high interest rates and fees to credit card programs. Unlike big banks, local credit unions operate under a mandate of providing its members with low-interest borrowing opportunities.

Charging only necessary rates and fees, these credit cards reduce monthly interest and eliminate most fees. Using the right credit card as a consolidation tool can help you keep more of your money.

Although low-interest credit cards typically don't deliver rates comparable to secured loan options, they rank among the best alternatives for people with limited assets.


How to Improve Your Consolidation Loan Approval Chances


It’s important to put yourself in the best possible position to gain approval for a debt consolidation solution. Seemingly subtle differences in your finances can impact your credit score and determine whether you enjoy access to the lowest rates and favorable terms. If rolling multiple bills into one convenient installment would improve your financial health and quality of life, these are ways to improve your chances of getting approved.

  • Credit Score: Request a free credit report from the three major bureaus — TransUnion, Equifax, and Experian. Check the report for any errors and request changes if necessary. Take proactive measures if you see any items that could be resolved to improve your FICO score.
  • Debt-to-Income: Lenders consider income to expenses as a significant metric when approving or denying consolidation loans. If you have the bandwidth to eliminate a credit card balance while keeping the card or pay off a straggling personal loan balance, take action before applying.
  • Pre-Qualify: When people apply for loans, lenders must make what is known as a “hard credit pull.” A credit score and report are requested from the three major bureaus. In doing this, your score dips slightly. By contrast, pre-qualifying only involves a “soft” inquiry, and your credit score is not necessarily impacted. Getting pre-qualified helps determine how much you can borrow and if that figure can deliver debt relief.

If you fall short of the mark after pre-qualifying, it may make sense to have a loved one co-sign and bring collateral to the equation. Another option to consider is repairing your credit with a share secured loan. Open to those over the age of 18, you’ll enjoy lower rates as you rebuild your credit while securing your loan with the money in your own savings account.

How to Apply for the Best Consolidation Loan


Once you have completed your due diligence, applying for a consolidation loan is a relatively straightforward process. Gather necessary items such as bank statements, tax returns, state-issued identification, and proof of employment if applicable before applying online.

If you're ready to consolidate your debt or have questions about Peach State’s Home Equity Loans, Personal Loans, or Low Rate Credit Cards, please contact a Peach State Lending Specialist today!

For more tips on consolidation loans, review our Debt Consolidation: Expectations vs Reality Guide.

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