5 best debt consolidation options


At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict , this post may contain references to products from our partners. Here’s an explanation for

Getting out of debt is challenging, especially when you have multiple creditors. If you are juggling different accounts, payment amounts and due dates but feel like you’re chipping away at an iceberg, it’s time to consider debt consolidation.

Debt consolidation is the strategy of rolling many debts into a single payment. It can save you money in interest, help you pay off debts faster, simplify your finances and give you peace of mind.

Whether you’ve maxed out your credit cards or have a mountain of medical bills or student loans, it’s important to determine the best way to consolidate your debt.

5 best debt consolidation options:

  • Balance transfer credit card.
  • Home equity loan or home equity line of credit (HELOC).
  • Personal loan.
  • Peer-to-peer loan.
  • Debt management plan.

You need to know the pros and cons of each alternative to make the smartest choice.

1. Balance transfer credit card

You’ll need a balance transfer card with a credit limit that is high enough to accommodate the balances you’re rolling over and an ​annual percentage rate (APR)​ low enough to make it worthwhile. The best balance transfer cards often come with zero interest or a very low interest rate for an introductory period of up to 18 months.

A balance transfer card can be a good way to consolidate debt if you pay off the card before the introductory rate expires and you don’t rack up new debt.

Use Bankrate’s credit card balance transfer calculator to see how long it will take you to pay off your balances.

  • Pros: It’s quicker and easier to get a balance transfer credit card than it is a bank loan. You can save a lot of money in interest by paying off the balance before the introductory rate expires. Most cards let you transfer as many balances as you want, as long as your total balance is below the new card’s credit limit. Credit card debt is usually unsecured, so no collateral is required to qualify. If you default, you don’t risk losing assets.
  • Cons: Balance transfer cards often charge a fee of 3 percent to 5 percent of the amount transferred, and that gets tacked on to your balance. When the introductory rate ends, the card reverts to a variable APR that will be considerably higher. You can’t transfer credit card balances to a card issued by the same bank. Applying for a new credit card triggers a hard pull on your credit report, which can lower your credit score. If you run up balances on your cards again, you’re compounding the problem.

2. Home equity loan or home equity line of credit (HELOC)

Home equity is the difference between the appraised value of your home and how much you owe on your mortgage. If you’re a homeowner with enough equity and a good credit history,​ you can borrow some of that equity​ at an affordable rate to consolidate your debts. Many home equity borrowers use the money to pay off higher-interest debt, such as credit cards.

Be sure to understand the differences between home equity loans and HELOCs.

  • Pros: Home equity loans​ have lower interest rates than credit cards or personal loans, and loan amounts tend to be larger than personal loans or credit card limits.​ A traditional home equity loan has a fixed rate and a fixed monthly payment, which makes budgeting easier. Repayment terms typically range from five to 30 years, giving borrowers plenty of time to repay the debt.
  • Cons: When you tap into your home equity, your home is the collateral that secures the debt. If you lose your job and can’t make the loan payments, the lender can take your home by foreclosure. HELOCs often have variable interest rates and even a small rate adjustment can strain a tight budget. A long repayment term may feel comfortable but cost you more in the long run. Interest on home equity loans isn’t tax-deductible unless the loan is used to build or improve your property. It takes a lot more time to qualify and close on a home loan than it does for other types of credit.

View home equity rates

Tap into the value you have in your home to get the funds you need.

3. Personal loan

A personal loan can be a smart way to consolidate debt if you qualify for a low interest rate, enough funds to cover your debts and a comfortable repayment term. Personal loans are unsecured, so your rate and borrowing limit hinge on your credit profile.

  • Pros: You don’t have to use any assets, such as your home or car, as collateral to qualify for a personal loan. Interest rates on personal loans are fixed and typically lower than credit cards. Monthly payments are fixed, making it easier to budget and know exactly when the debt will be paid off. You can borrow as little as $1,000 or as much as $100,000, depending on the lender and your credit. Personal loans are widely available from traditional banks, credit unions, online banks, online nonbank lenders and peer-to-peer lenders. It can take as little as a day or a few days to qualify for a personal loan and get your funds.
  • Cons: A large, low-rate personal loan requires excellent credit. Personal loan rates are typically higher than rates on home equity loans. If your credit isn’t very good, a personal loan could cost as much or more than a credit card. Many personal loans come with origination fees and penalty fees for paying late and paying off the loan before the term ends. Scams are rampant in the personal loans marketplace, as are subprime lenders who charge exorbitant rates and fees to  consumers with bad credit.

Get pre-qualified

Answer a few questions to see which personal loans you pre-qualify for. The process is quick and easy, and it will not impact your credit score.

4. Peer-to-peer loans

Peer-to-peer lending platforms such as Upstart, Prosper, LendingClub and SoFi pair borrowers and individual investors for unsecured loans that generally range from $25,000 to $50,000. Like personal loans, P2P loans are unsecured, so the borrower’s credit history is the key factor for rates, terms, borrowing limits and fees. The higher your credit score, the lower the interest rate and the more you can borrow.

  • Pros: Borrowers with tainted credit might find it easier to get a loan through a peer-to-peer network than from a traditional financial institution. P2P loans can be used for nearly anything you need. The application and approval process is quick because everything is done online. If your application sails through to approval, it’s possible to get funding the same day. The initial application for a P2P loan triggers a soft pull on your credit file and doesn’t hurt your credit score.
  • Cons: Rates on P2P loans are generally higher than home equity loans. You have far less time to repay the loan than you do credit cards and home equity loans. Interest rates can hover near 35 percent if your credit is bad. Many P2P loans come with origination fees that are deducted from the loan proceeds. There may also be penalty fees for late payments and for paying off the loan early. “Read the fine print and know what you are getting into,” says Celeste Collins, executive director of O​nTrack WNC Financial Education & Counseling​ in North Carolina. “I do think it’s cool that there are alternative ways to borrow money.”

5. Debt management plan

If you want debt consolidation options that don’t require taking out a loan or applying for a balance transfer credit card, a debt management plan could be right for you.

With a debt management plan, you work with a nonprofit credit counseling agency to negotiate with creditors and draft a payoff plan. You close all credit card accounts and make one monthly payment to the agency, which pays the creditors. But you still receive all billing statements from your creditors, so it’s easy to track how fast your debt is being paid off. To create a debt management plan, stick with not-for-profit agencies affiliated with the N​ational Foundation for Credit Counseling (NFCC) o​r the ​Financial Counseling Association of America​, and make sure your debt counselor is certified by the Council on Accreditation.

“This is not for people who just want a better interest rate,” Collins says. “It’s a radical step that’s often seen as an alternative to bankruptcy. We help people really shift their relationship to money.”

  • Pros: With a debt management plan, you’ll get some of the best loan rates for consolidating debts and an end to penalty fees for late payments and exceeding your credit limits, says Bruce McClary, spokesman for the NFCC. Some credit-counseling agencies may work for little to nothing if you’re struggling. While you’re on a debt management plan, you won’t be able to rack up more debt because you’ll have to close all of your accounts. If you keep up with your payments and don’t go deeper into debt, a debt management plan can help improve your credit score in the long term.
  • Cons: Entering into a debt management plan does not lower your balances. Having to close out credit accounts to get on a debt management plan will lower your credit score. Be sure you do not confuse debt management with “debt settlement.” Debt settlement businesses, which are illegal in some states, offer to settle your debt for pennies on the dollar. They collect money from you over time, put it in trust and when they think there is enough to make your creditors a settlement offer, they negotiate an amount. “They ask that credit card statements go to them, so the consumer doesn’t even know what is going on,” Collins says. Getting to the negotiating stage can take years. In the meantime, your credit is ruined. And you might have to pay tax on the forgiven debt. For example, if you owed $12,000, but it was negotiated down to $4,000, you could owe tax on $8,000.

How to avoid falling into debt

Consumers who have borrowed and spent so much that they must borrow more to consolidate debt need to take a hard look at their spending habits. “You need to identify where the debt came from,” Collins says. “How did this balance get there? You need a comprehensive cash flow plan and to get serious about paying this down.”

Once you crawl out of the debt hole, you can avoid that predicament again. Here are some rules to live by:

  • Set a budget and stick to it. Live within your means.
  • Avoid impulse purchases.
  • Shop around for the lowest price before making a big purchase.
  • If you use a credit card, pay off the balance each month to avoid interest charges.
  • Keep your finances organized, and keep a close eye on your bank balances.
  • Stay away from “buy now, pay later” and “interest-free financing” offers, which just defer your debt.
  • Save money. Try to set aside a certain percentage of your income to be swept into savings.

Get pre-qualified

Answer a few questions to see which personal loans you pre-qualify for. The process is quick and easy, and it will not impact your credit score.

The bottom line

If you have to borrow money to consolidate debt, avoid subprime lenders who cater to consumers with bad credit, says McClary of the NFCC.

“Subprime lenders are widely known for offering the highest interest rates and fees for loans,” he says, “so it pays to consider other financing options first. Never assume you can’t qualify for a better rate without checking your credit and shopping around.

“Even if you qualify for a loan from a prime lender but aren’t approved for their lowest rate, the difference between that rate and one from a subprime lender could save you thousands of dollars and can make it much easier to make faster progress paying down your balance,” McClary says.

Also, take every precaution to make sure your lender is legitimate. Check the Better Business Bureau website to see whether a lender is accredited.

Lenders and brokers must be registered in the states where they conduct business. Look for this information at the lender’s website or contact your state attorney general’s office for further verification.

Getting a fixed-rate loan to consolidate debt? Use our loan calculator to find out what your payments will be.