Debt consolidation is a practical approach to managing your debt by combining multiple debts into one payment. You’ll achieve a more uncomplicated debt management strategy when paying one enormous debt instead of several. Borrowers often take out a debt consolidation loan to pay off multiple creditors but increase their overall debt burden. Read on to learn who qualifies for this consolidation and what to do if you have bad credit.
Debt Consolidation Loan Explained
A debt consolidation loan is where financial institutions like Symple Lending provides funds to pay off your outstanding card debts, consolidating them into one big loan. These loan types prove helpful to any individual having a hard time making their monthly payments. However, you still need to qualify for one by meeting the specific needs of each lender.
How Does It Work?
Many individuals consider debt consolidation as an approach to relieve financial stress. A lender will give you the money to pay off your existing debts while combining all your debts. If you have two cards with a total debt of $20,000, the bank will lend you the funds if you qualify to receive $20,000. They will then pay off your credit card debts and have you pay a one-month payment of $20,000.
The only downside to consolidation is that you lack a realistic household budget. It means you’ll struggle financially again, which results in you reapplying for several credit cards every month to pay off your loans.
Who Qualifies for Debt Consolidation?
There are four major debt requirements to qualify for debt consolidation. Lenders’ requests are strict on these requirements as it helps validate the borrower’s ability to repay the loan. The requirements are;
- Proof of income- Lenders often request proof of income to confirm you have the financial muscle to meet the terms of your loan.
- Credit history- Lenders will also analyze your credit report and payment history before you qualify for debt consolidation
- Financial stability- It helps lenders identify if you are a reasonable financial risk
- Equity- You’ll qualify for larger loans depending on the loan’s collateral
The requirements for borrowers to qualify for debt consolidation loans vary with every lender. You must be above 18 years old and not be involved in foreclosure proceedings or bankruptcy. All lenders will also check your credit score, debt-to-income ratio, and income to help determine if you can repay the loan.
A credit score of around 650 will put you in the good books of most lenders. Bad-credit consolidation lenders also exist but feature higher interest rates as the borrowers are more likely to default.
Your debt-to-income ratio should not exceed 45% to qualify for a big debt consolidation loan. A higher DTI will leave the lender second-guessing whether to approve your loan, as you might find it challenging to make timely payments. You can still qualify but with a higher interest.
It would be best if you had the plan to eliminate your debt effectively. Debt consolidation is an ideal approach to clear all your loans, although a temporary fix. It would help to be cautious when taking out loans, even if you qualify, as some lenders are predatory.
