Debt consolidation loans are personal loans used to merge high-interest debts such as credit cards, payday loans or other bills into a brand-new fixed-rate loan. After you receive the funds from this loan, they are used to pay off your other debts. If you pay back the loan on time, secure a lower interest rate and don’t take on any additional debt you can’t handle, you may be able to pay off your debt faster and save a ton of money on interest.

However, although using these loans is a good way to consolidate payments and hopefully lower the interest rate on your debt, there are several debt consolidation loan alternatives for people who may not qualify for a debt consolidation loan or those looking for rock-bottom interest rates.

Why debt consolidation loans may not work

Though debt consolidation can be a good solution for some, it may not work for everyone. For instance, consolidating your debt is no guarantee that you won’t get into debt again. If you have a track record of living beyond what your budget can accommodate, you may also need to focus on establishing a budget moving forward.

In addition, some debt consolidation loans charge various fees, including origination fees, late payment fees, and even balance transfer fees. Be sure to calculate the cost of all fees when deciding whether a debt consolidation loan is the best move for your finances.

Finally, you may also pay a higher interest rate on the debt consolidation loan if your credit score is not ideal.

Debt consolidation loan alternatives

A debt consolidation loan is not right for everyone. Because debt consolidation loans are unsecured personal loans, lenders may have tighter eligibility requirements, or the loans may not be large enough for the types of debt you’re trying to consolidate.

Balance transfer credit card

A balance transfer card allows you to transfer debt from other credit cards — usually credit cards from other companies only — or use a balance transfer check to combine other forms of debt at a 0 percent interest rate. This low promotional rate period typically lasts from 12 to 21 months, and a good to excellent credit score is needed for approval. Once the introductory period ends, you’ll be responsible for paying the card’s standard interest rate on the remaining balance. Additionally, most cards will charge you a balance transfer fee on the total amount you transfer, typically from 2 to 5 percent.

Lightbulb
Best for
A balance transfer credit card is good for those who have a small amount of debt that can be paid off completely during the card’s 0 percent APR introductory period. Balance transfer cards are also a smart choice for disciplined consumers who will not get into deeper debt with a new credit card.

Home equity loan or HELOC

Home equity loans and home equity lines of credit (HELOCs) allow you to borrow against the equity in your home. While a home equity loan has fixed monthly payments at a fixed interest rate, a HELOC works like a credit card and has a variable interest rate. Both can be used to consolidate high-interest debt, but you’ll risk losing your home if you can’t pay them back. Also, both require that you have a certain amount of equity in your home. Compared with debt consolidation loans, home equity loans and HELOCs often have longer repayment periods, larger loan amounts and lower interest rates.

Lightbulb
Best for
Home equity loans tend to be best for borrowers seeking to cover significant costs and who know exactly how much money is required. HELOCs are a better option if you need flexibility in the amount of money you’re borrowing and are a disciplined borrower who will not use more money than you can reasonably afford to repay.

Cash-out refinance

A cash-out refinance replaces your existing mortgage with a brand-new one that’s larger than your current outstanding balance. You can withdraw the difference between the two balances and use it to improve your home or consolidate debt. As with using a home equity loan or HELOC, you’ll risk losing your home if you can’t repay your new loan.

Lightbulb
Best for
Borrowers with a less than optimal credit score may have a better chance of getting approved for a cash-out refinance than some of the other alternatives to debt consolidation loans.

Debt settlement

Debt settlement occurs when you negotiate with your lender to pay a lower amount than what’s owed to satisfy the debt. You can negotiate with the debtor yourself or pay a fee to a debt settlement company or lawyer to negotiate on your behalf. Even if you, a lawyer or a company successfully negotiates a settlement, your credit score may take a hit.

Lightbulb
Best for
Debt settlement should generally be one of your last resorts. It will impact your credit negatively for a time, and the settlement companies typically charge fees. And there’s no guarantee a settlement will be negotiated. However, this may be a good choice if you have exhausted other options.

Bankruptcy

Filing for bankruptcy involves going to a federal court to discharge your debts or reorganizing them to give you time to pay them off. Although you can discharge your medical debt, personal loans and credit card debt in bankruptcy, it’s incredibly difficult to discharge student loans and tax debt. Before you choose this alternative, keep in mind that your credit score will suffer a major blow; it may take years for it to recover.

Lightbulb
Best for
If you’re looking for a fresh start, bankruptcy may make sense. However, if you use this approach, it’s best to commit to paying your bills on time moving forward, establishing a budget and avoiding the habits that got you into significant debt.

The bottom line

While using a debt consolidation loan to merge your high-interest debt can make sense financially if you can secure a lower interest rate, it’s not your only option. In some cases, choosing an alternative route can be a better choice. For example, you might be able to secure a lower rate by taking out a home equity loan since it’s a secured loan backed by your home.

However, knowing the risks of choosing such an alternative is also important. Shop around with different options and compare the interest rates, repayment terms and trade-offs you’ll make with each one before proceeding.

Learn more: