Your credit card debt keeps mounting even though you’ve been trying to keep it under control by paying minimum balances, but you’re not getting anywhere fast. It may be time to seek help if you’re not sure how to get out of debt. The good news is that there are several debt solutions available. A debt consolidation loan, a debt management plan, and debt settlement are a few of the possibilities. But for many people, a debt consolidation loan is the first solution that comes to mind.

Unfortunately, there’s a lot of confusing information out there about debt consolidation loans and, sadly, some disreputable companies as well. It’s important that you’re equipped with the knowledge to figure out if debt consolidation is best for your debt situation, since the key to your success in figuring out how to pay off debt lies in using the right strategy (and the right lender) for your particular financial situation.

There are many ways to consolidate debt. Debt consolidation loans tend to be a popular choice because they could be a smart solution for people with different financial situations. They can be used for credit consolidation from credit card debt, payday loans, student loans, medical bills, or personal loans. However, they’re most commonly used for credit card debt. They’re especially effective for paying off high interest rate cards, since debt consolidation loans could come with a lower interest rate than your average credit card, which can help save money over time.

Read on to learn the ins and outs of debt consolidation loans and the application process. We’ll outline who this type of loan is best for and who may benefit more from other options, like debt settlement.

What Exactly Is a Debt Consolidation Loan?

This type of loan will, as the name describes, consolidate or combine your multiple payments and accounts into one account with one lender, meaning you could have one monthly payment at a lower interest rate. Since your credit consolidation loan may come with a specific end date and a lower interest rate, you’ll have a predictable monthly amount to set aside. This can help make it easier for you budget, since trying to keep track of multiple payment dates and amounts for multiple cards each month can be difficult.

Debt consolidation loans can come from various sources: you could take out a personal loan from a traditional bank, credit union or other lender, use the cash from a home refinance, or from one of the debt consolidation companies that offers loans. A debt consolidation loan could be the best choice for your amount of debt and overall financial situation if you have a clean credit history, good credit score, reliable income, and a debt-to-income (DTI) ratio in the right range. (More on that below.)

Finding the Right Lender

It can’t be stressed enough: it’s important to do your homework before committing to any lender. Shop around and compare interest rates and terms from various sources to ensure you’re getting the best deal—interest rate/fees and terms—to consolidate your debt. You should be able to easily get free quotes and debt consolidation loan estimates online, and you should compare at least three.

One thing to think about is the type of debt consolidation lender you want to work with. Most banks offer solutions on how to get out of debt, as do peer-to-peer lending (also known as crowd lending or social lending) companies. Traditional brick-and-mortar banks may have more stringent qualification criteria for how to pay off debt and charge more. Furthermore, some will charge you a penalty if you pay off the loan early, and may also charge what’s known as an “origination” fee.

With peer-to peer lending companies, you’ll be matched with individuals with money to lend who’re willing to give you a loan. In general, these types of lenders make it easier to get approved and they have more flexible options. Peer-to-peer lending removes the middleman, so you could pay less for the loan, but it may come with more risk and could take more effort and time to put in place. Ideally, you want to find a peer-to-peer lender that doesn’t charge a prepayment penalty fee or origination fees.

The Application Process

After you’ve decided that a debt consolidation loan is the right way for you to get out of debt and have found the lender you want to work with (after you’ve compared several debt consolidation companies), you need to apply for the loan. An application process typically follows these steps:

Get Pre-Approved

The lender will do a soft inquiry on your credit to get your rate quote. A soft inquiry is standard in the pre-approval stage and won’t affect your credit as it’s considered a promotional inquiry. You’ll likely need:

  • squeaky clean credit with no tax liens, foreclosures, bankruptcy, or repossessions in your history
  • a good or at least fair credit score between 680 and 739
  • a debt-to-income (DTI) ratio of 50 percent or less

If your credit score is good or excellent, you have a better chance to qualify for a low interest rate. The DTI is calculated by dividing your total recurring monthly debt by your gross monthly income. If your monthly payments exceed or are too high compared to the money you’re earning, you may not qualify for this type of loan.

Select Your Loan Terms

The terms include the amount you’ll borrow and the length of time you’ll have to pay the loan off. Debt consolidation loans typically last from two to five years. Typically, the longer the loan term, the higher your interest rate.

Finalize Your Loan

You’ll need to:

  • Substantiate your income by showing paystubs so the lender knows you’re capable of paying the loan back
  • Provide proof of your identity (e.g. driver’s license or passport)
  • Show length of time at current address which supports your general stability

At this stage, the lender will pull your credit report, creating a hard inquiry. A hard inquiry will cause your credit score to dip temporarily.

Money Management Going Forward

After you get the loan and use the money to pay off your creditors, you may be feeling that a huge burden has been removed. But while credit consolidation can get you started on the road to financial health, be aware that you’re not home free just yet. Yes, you’ve gotten all your creditors and all your minimum payments and due dates combined into a more manageable loan, with one due date and one monthly payment. But you still own the debt. You’ve merely moved it from multiple high interest, variable rates to one lower fixed rate. Instead of showing you how to get out of debt, a debt consolidation loan really just puts you into a different type of debt.

There are a couple of things to focus on at this point: you need to commit to making the monthly loan payment on time, and you need to change the behaviors and situations that caused you to get into debt in the first place. If you keep using the credit cards you just paid off, you run the risk of getting back into debt. And you could end up in a worse place than before, with yet another creditor added to your list. Dig deep and analyze your spending habits. If you find you’re spending more than you earn, make a budget and stick to it. Track all your expenses and eliminate those that aren’t necessary.

If you’ve fallen behind or missed payments in the past because you had too many to keep track of, the consolidated loan will help solve that issue. But you still need to get organized. Set up automatic payments for all your recurring bills and, as long as you have enough money in your bank account to cover them, you’ll have one less thing to worry about.

When a Debt Consolidation Loan Is Not the Answer

While debt consolidation loans are an attractive solution that make sense for many people, they’re not the right fit for everyone. As mentioned above, if you have too much debt, have poor credit, or your debt-to-income ratio is too high, most lenders will consider you too great a risk and be leery of taking a chance on you repaying the loan. And even if they do offer people poor credit loans, they could charge such a high interest rate and fees that it won’t help your situation at all.

If your credit score is too low, the high rate the loan companies will offer will mean that you’d be better off just keeping paying the minimum payments on your cards. Moreover, if you ended up with this debt because of a life-changing event like getting divorced or losing your job, the loan won’t address the root cause and you run the risk of getting stuck in a new cycle of debt.

At this point, it’s easy to get desperate, and there are debt consolidation companies out there that will take advantage of that. Be aware that there are lenders out there who claim to have bad credit loans available for you. Treat them with a lot of skepticism, since they may not be your best option.

One of the most common scams is to charge you a fee for your application, then not give you the loan. Avoid dealing with any company that requests a fee upfront.

Most of the time, debt consolidation loans with poor credit are usually not a good idea. If you’re struggling with debt and have bad credit as well, a loan of any kind (unless it’s interest-free) is not going to fix your problem. There’s no point trying to borrow more money on top of what you owe when the interest rate will be so high.

Debt Settlement Could Be the Answer

Before you admit defeat and give up on ever figuring out how to get out of debt, know that there is another option available, and it’s one that hundreds of thousands of people have chosen: Freedom Debt Relief has provided this option since 2002, and we have many clients struggling with debt who started out thinking that debt consolidation programs were their answer, only to discover that our debt relief program was actually a better option for them.

Also known as debt negotiation or debt resolution, debt settlement works by negotiating with your creditors to reduce the overall amount you owe them. The creditor “forgives” a portion of your debt, so you are able to get out of the debt much faster than you could making minimum payments. Typically, this process is used for unsecured debt from medical bills or credit cards.

Unlike a debt consolidation loan, a debt settlement program doesn’t move you from one type of debt to another. When the debts you enroll in the program are resolved, they are reported as such to the credit bureaus and you are free of that debt.

The key to success with debt settlement is in negotiating a reduction in the amount owed to creditors. Getting a creditor to agree to accept a lesser amount than what is owed requires skill and experience. Any consumer could attempt to negotiate with their creditors on their own, but most people aren’t experienced in this type of negotiation and don’t know who to call or what to say. While all debt settlement companies offer this service as part of their program, not all debt settlement companies have the same level of negotiation experience, so not all can deliver the same amount of savings/debt reduction.

Freedom Debt Relief has been providing these negotiation services as part of their program since 2002. Our professionals have many, many that enable us to know all the key strategies and techniques for getting bigger debt reductions (and thus bigger savings) for clients.

If you think debt settlement could be a better way to get out of debt than debt consolidation, please make sure you are only comparing companies that, like Freedom Debt Relief, are reliable with a good track record for good results and happy clients. We are proud of the fact that over half a million Americans have enrolled in our program so far. We’ve resolved 8 billion dollars in consumer debt—much more than any other debt settlement company in the United States.

Debt settlement could also be the answer you’re looking for on how to pay off debt because its requirements are not tied to your credit score. For example, you could still qualify for the Freedom Debt Relief program even if your credit is less than perfect and your DTI is higher than you’d like. The program enables you to pay off your debt far quicker than if you were just making the minimum payments on your cards each month. And, since you won’t be accruing interest and fees over many years, as you would if you just kept making minimum payments, your savings could be that much more.

Depending on how much you owe, the Freedom Debt Relief program could help you be debt free in as little as 24-48 months*—much faster than the years it might take making only minimum payments each month. The exact length of your Freedom Debt Relief program would depend on your debt, your goals, and your budget. Each client’s program is custom-designed for them.

Regardless of whether you choose debt consolidation, debt settlement, or another debt solutions, you’re headed in the right direction already by even considering the options. And if this article hasn’t answered all your questions, one of our Certified Debt Consultants would be happy to answer any questions you may have about debt consolidation, the Freedom Debt Relief program, and other debt solutions like debt management. Feel free to give us a call at 800-230-1553 to let us get you one step closer to finding the right debt solution for your budget and goals.

Freedom Debt Relief is known for low-pressure consulting and passionate employees who truly want to help people find the right solution—even if that solution isn’t our debt consolidation program. Our goal is to help you find the best way forward to overcome your debt and create a brighter financial future.

Request your free, no-obligation debt consultation from Freedom Debt Relief today and find out if debt settlement could be a better solution for you than a debt consolidation loan.