Getting a loan for debt consolidation: how does it work?

The accumulation of credit cards and personal loans with high interest rates suffocate household cash flow and can even lead to personal bankruptcy in the event of a change in circumstances or hardship. Depending on the scenario, the loan for debt consolidation can be a good solution. But how do you get this type of loan?

A loan perfectly suited to certain situations

A loan

The debt consolidation loan allows you to consolidate debts from credit cards, utilities or personal loans. It is not a miracle recipe that works in all difficult cases, but this type of loan can improve the situation of the household if:

  • debts to be consolidated have an interest rate higher than that of the consolidation loan

  • the new monthly payments of the consolidation loan are lower than the previous maturities thanks to a lower interest rate and a re-spreading of debts

  • household income has decreased or is less regular than before

  • the current credits risk to lead to the bankruptcy, to a default of payment of a mortgage, or to the loss of its house, its car or to a deterioration of its credit rating.

Debt management is also simplified since the new loan takes up all the credits, except for the payment of the mortgage which cannot be included in a consolidation loan.

Some contracts even offer flexible payment options, allowing prepayments to be made without penalties or fees.

Lender requirements

Lender requirements

Consolidation loans are usually given to borrowers who report

  • an acceptable credit rating

  • sufficient income to absorb the new loan and in particular a debt ratio of less than 40%

  • stable employment for several years in some cases

In other words, in order to avoid being refused, it is strongly recommended that you apply for a consolidation loan before the situation deteriorates and affects your credit rating.

The optimal process for making a request

The optimal process for making a request

  • List the debts: before applying for a consolidation loan, the first thing to do is to list the different loans taken out, indicating the monthly payment and the end date for each loan. At the same time, a summary of income should be drawn up in order to determine debt.

  • Shop around: it is advisable to find out about the rates charged by the various organizations in order to have a range of rates.

  • Submit requests: when three organizations have been selected, it is time to make the requests and provide the requested documents. Better to limit yourself to three so as not to multiply the requests that can negatively impact the credit rating.

  • Compared: Once the offers in hand, it is important to check in each all the conditions of the contract, and in particular the interest rate, the duration of the loan or even the special conditions, in order to determine the total cost of the loan . To put it simply, it is possible to use online calculators to perform simulations and to be able to objectively compare the different offers.

Once the consolidation loan is granted, the institutions pay the debts directly to the creditors or pay the funds to the borrower who is responsible for settling the debts.

Some lending organizations even close accounts opened in stores to prevent new borrowing.

Because one thing is certain: it is essential to discipline oneself so as not to incur new debts, such as those which contributed to the need for putting in place a consolidation loan.