What is the best way for me to try to get a debt consolidation loan?
December 3, 2009 10:17 PM   Subscribe

What is the best way for me to try to get a debt consolidation loan?

I have around $20k of credit card deb. The interest rates vary, some are quite high and some are decent. I have a decent salary and I could pay it off in a few years, but I would prefer to get a debt consolidation loan and pay that instead.

The issues:
1. My credit score isn't very good, around 650 at the moment. When the financial crisis hit, a bunch of my cards closed my account or lowered the credit limit right down to the balance I was carrying. Ratio of debt to available credit is the main thing holding my score down- prior to the crisis it was up around 700.

2. I have one debt consolidation loan from my credit union already. This will be paid off in about 3 more payments. This was a "special offer" they had and I'm not sure they offer any specific debt consolidation loan right now. I also owe my bank about $3500 on a Visa card they issue. I've had an account there for about 9 years now and in general they've been great.

I'd like to get a loan to pay off some or all of the debt. A good interest rate would be nice, but I realize that's probably not going to happen in the current climate and with my crummy credit score. My main goal is get the debt off my credit cards and get my credit score back up.

So my questions are:

What's the best way to approach my bank about this? I don't want to just randomly start applying for loans without knowing if I'll be accepted. I'd like to get a little more insight into the process they use:
-Will I help my chances if I pay off the credit card they issue first? -Will it significantly help my chances if I finish paying my current loan before asking for another one?
-How much of a factor is the amount I ask for? I would be happy even being able to borrow $10k or so. When asking for these kind of loans, does it make sense to just ask for a high amount, and then they will meet you with what they're willing to lend, rather than just saying "no?" I think that's how it happened last time.
-Does it hurt my credit score to apply for and be turned down for a loan?
-If anyone has insight into the inner workings of giving loans, I'd be curious to hear an estimate of what kind of credit score is generally needed to get a loan like this.

Finally, is there any website that would help me find other banks that might be willing to give me this loan? Or are there any other novel solutions to revive my credit score I'm missing? I realize no one is lending much money right now, so the only answer may well be "just pay it off yourself."

Other data:
-I don't want to go into debt consolidation or bankruptcy.
-I rent and lack many other valuable assets. My car is old and beat up.
-I am in California.

This is not a referendum on the wisdom of my past financial decisions. Thank you.
posted by drjimmy11 to Work & Money (6 answers total) 4 users marked this as a favorite
Response by poster: "credit card deb" = "credit card debt"
posted by drjimmy11 at 10:22 PM on December 3, 2009

Response by poster: One more factor: Assuming nothing happens to my job, I have a $10k guaranteed bonus coming in five months. Should I wait, use the $6k after taxes to pay some of the cards, and then apply for a loan?
posted by drjimmy11 at 10:26 PM on December 3, 2009

Why not consolidate?
posted by k8t at 10:42 PM on December 3, 2009

He is trying to consolidate. He just doesn't want to use a debt counseling or consolidation service.
posted by dyno04 at 5:38 AM on December 4, 2009

What's the best way to approach my bank about this?

I'd old-school it. If you talk to a person in your bank (don't start filling out forms or applying, which can impact your credit rating), it's pretty simple question.

"I have $30K in credit card debt, which has some badly high interest of course. Can your bank give me some sort of single loan with a better rate?"

(And, you know, check that bank across the street too. They're competing for business, right?)

The mentally-healthy way to approach things like this is to remember that they're not doing you some kind of favor here. You're giving them a chance to sell you one of their financial products: they make money from you instead of the CC companies making money from you. Win-win.
posted by rokusan at 5:48 AM on December 4, 2009

What you are looking for is an unsecured, personal, or signature loan. My credit union currently offers rates at 13% to 21% APR on amounts up to $10,000. I don't know what your credit has to be to get those rates.

You could also try Prosper. I'm currently a lender there. It works like an auction, matching borrowers with multiple lenders at the lowest interest rate that funds the loan. Borrowers borrow from $1000 to $25000. Lenders loan from $25 to $25000 per loan. All loan terms are 36 months and there is a 3% closing fee taken out of the loan when it originates. (Many mortgages and almost all credit cards have a similar fee) There are no prepayment penalties.

When you borrow these things show up to the lenders:

Prosper rating based on historical data AA to HR(proprietary)
Prosper score 1-10(proprietary and different from above)

Approximate credit score (20 point range)
Number of accounts now delinquent
Amount of money now delinquent
Public records last 12m/10years
Delinquencies last 7 years
Inquiries last 6 months
First credit line date
Current/open credit lines
Total credit lines
Revolving credit balance
Bankcard Utilization %
Whether you own a home or not
Debt/Income ratio
Employment status
length of status
Stated Income range

Some of that info is self reported, and other is taken from your credit card report. Prosper verifies the self reported some of the time.

You also get to state your case, telling the lenders why you need the loan and your budget and anything else you want to say. Lenders seem to llike to lend to people who seem serious about paying down their debt.

If you have 0 accounts now delinquent, 0 public records, and 0 delinquencies that looks good to a lot of lenders. If you have multiple inquiries, people do start to wonder what you are doing. Opening a prosper loan generates an inquiry.

On prosper, actually owning a home has been historically bad. That is, there are statistics out there that show that those who don't own a house have better repayment records on prosper than those who do. This might be related to those who choose/are forced to choose Prosper to get their loan.

Applying and being turned down for a loan hurts you in that it generates an inquiry and you don't pay off your debt. Inquiries knock down your credit score but not by much according to myfico.

If you ask for a larger loan Prosper rates you a worse credit risk than if you ask for a lower loan.

In my "portfolio" of loans there is one person with a similar credit profile to yours. 0/0/0 delinqencies and public records, 640-659 credit score, almost $20,000 in credit card debt, asking for a $8,000 loan. His loan was funded to a rate of about 25% with an apr of 27%.

As long as you maintain the accounts in good standing, you could get a better rate on Prosper or else where in 6 months after you use the $6,000 to pay down debt, so long as the credit card companies don't lower your available credit along with your debts once again. To prevent that from happening too much, I'd suggest completely paying off cards one at a time. The companies are less likely to lower your limit all the way to $0 than to continue following all the cards you owe on down to $1000 or so. Also, due to the origination fees it hurts you to get a loan and six monts or a year later move that loan somewhere else.

If you do decide to try Prosper let me send you an invite. I'd get some money from it! But I don't want to spam your gmail.

Good luck with your credit battles!
posted by GregorWill at 12:38 PM on December 4, 2009

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