Key takeaways

  • Debt consolidation loans may not be the best option for every financial situation.
  • Balance transfer credit cards, home equity loans and home equity lines of credit (HELOCs) are ways to consolidate that may be less expensive in some cases.
  • Debt settlement and bankruptcy are costly options both in terms of money and financial health, and should be carefully researched.

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.

But debt consolidation loans aren’t for everyone. 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.

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 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.

Best for small debts

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 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.

Best for budget-minded individuals

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.

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.

Best for those with less-than-perfect credit

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.

Best for those who have exhausted all other options

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.


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.

Best for those who have exhausted all other options

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.

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 different options and compare the interest rates, repayment terms and trade offs you’ll make with each one to calculate how much you’ll actually save before proceeding.