How To Secure A Low Interest Debt Consolidation Loan

If you are looking for a low interest debt consolidation loan you will need at least two of the following three things, if not all three.

1. Good credit.

2. Ability to pay back the loan.

3. Equity in your home.

A Good Credit Score

Regardless of what type of loan you get to consolidate your debts, your FICO score will determine whether or not you get offered a low interest rate or a high one. Most experts would agree that a FICO score of 620 is pretty much the minimum cut off point to qualify for a prime loan. Anything lower and you are into 'sub-prime' territory. (prime = lower rates, sub-prime = higher rates)

To qualify for a truly "low" interest rate you will likely have to have a FICO score of 720 or higher. (850 is a perfect score)

One of the difficulties of qualifying for low interest debt consolidation loan, is that you are already in debt. You see, as much as 30% of your FICO credit score is determined by the amount of debt that you owe. And people who are looking for debt consolidating loans typically have a fair amount of debt already.

high amounts of debt = lower credit score = higher interest rate loan

And if your payment history (which accounts for about 35% of your credit score) is less than perfect, you may be looking at an even higher interest rate.

If You Get A Low Interest Debt Consolidation Loan, What Is Your Ability To Pay It Back?

While you FICO score determines the interest rate you will pay on the loan, your ability to pay back or "service" the loan will play a large role in whether or not you get the loan in the first place. It will also determine how big of a loan you qualify for.

Do You Own Your Own Home And Have Equity In It?

Securing a debt consolidation loan using your home as security may help to reduce the interest you are charged as well. Typically you have to keep the debt to equity ratio below 80% after the new loan is in place if you wish to qualify for the lower interest rates. The lender is going to feel much more secure knowing that if something goes wrong with the loan (ie. you can't pay it back), they have collateral that they can go after. Therefore they are willing (and able) to offer you a lower rate.

Aside: I would be remiss if I didn't point out that the very reason that a lender will offer you lower rates on a debt consolidation loan when it is secured by your home is a very good reason not to take out a home loan to pay down your debts. What do I mean exactly? Well, by taking out a new loan secured by your home to pay off your credit card debts, you are now swapping unsecured debt for secured debt. In other words, your creditors now have something tangible to come after if you default.

The Best Case Scenario For Getting A Low Interest Debt Consolidation Loan

You have probably figured it out by now, but here is your best bet for getting a low interest debt consolidation loan...

1. Have a FICO score of 720 or higher

2. Have the ability to service a large enough loan to pay off your existing debts.

3. Use a debt consolidation home loan to consolidate your debts, keeping your debt to equity ratio under 80%.

If You Don't Have Good Credit Or Home Equity

You may be saying to yourself, "I don't have good credit and I don't have any home equity. What do I do?" Don't be too worried, there are other debt reduction options to consider that work regardless of your credit or whether you own a home. You can also take comfort in knowing that debt consolidation loans are usually just a band-aid solution to one's debt problems anyway. Real debt relief comes from living within your means, preparing a detailed personal budget, and focusing intently on paying off your debts.

Many people are fooled or misled into believing that it is the interest rate they are paying that is causing or has caused their debt problems. Although this is partially true, it is the underlying debt, and how it is accumulated that is the real culprit.

Want to learn more about all of your debt relief options? Start with my "Getting Out Of Debt" primer. It lays out your options (including a low interest rate debt consolidation loan), and helps you choose the right one for your situation.


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