Key takeaways

  • The benefits of debt consolidation include saving money on interest, paying off debt more quickly and streamlining finances.
  • There are many options to consolidate debt including balance transfer credit cards, home equity loans, debt consolidation loans and peer-to-peer loans.
  • Once you eliminate the debt, you can avoid re-entering it again by establishing a budget and living within your means.

Debt consolidation involves rolling multiple debts into a single loan or line of credit with a fixed monthly payment. There are several ways to consolidate, and each can save you money in interest, help you pay off debts faster and simplify your finances. It could even lead to getting out of debt just a little faster than you would otherwise — especially if you’re able to score a lower average interest rate.

1. Balance transfer credit card

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. These allow you to move the balances from high-interest rate credit cards and other debts to the new card. The idea is to pay the entire balance before the promotional APR period ends. Otherwise, you risk racking up even more interest than you started with.

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


  • Quicker and easier to get than many other loans.
  • Potential to save money if the debt is paid during the intro period.
  • No collateral is required, so there is no risk of losing assets.


  • Does not address poor spending habits.
  • A typical fee of 3 percent to 5 percent of the amount transferred on top of the balance.
  • APR after the intro period is likely higher than other loans.
  • Hard pull on your credit report.

Using a balance transfer credit card is best for those who can avoid using their existing credit cards once the balances have been shifted to the new card. If you choose to use a balance transfer credit card, have a plan to pay off the debt before the credit card’s introductory rate expires.

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

Your 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.

Your options for borrowing from home equity include home equity loans, which give you a lump sum of money at a fixed rate, and HELOCs, which give you a credit line to draw from at a variable rate. Both act as second mortgages, which means you’ll add an additional monthly payment to your plate. Still, they can be good options for debt consolidation if you have enough equity to qualify.


  • Fixed rate and fixed monthly interest for home equity loans.
  • Larger loan amounts.
  • Long repayment terms.
  • Lower interest rates than credit cards or personal loans.
  • Variable rates for HELOCs.


  • Home is the collateral that secures the debt.
  • Interest on the loan is not tax deductible.
  • Longer funding timelines on average.
  • Longer repayment timeline can mean higher costs overall.

HELOCs are often best for those who have significant equity in their home and prefer a long repayment timeline. That being said, it’s important to shop around to find the most competitive rate to avoid racking up thousands in interest. Also make sure you have confidence in your repayment ability, both now and down the road.

3. Debt consolidation loan

A debt consolidation 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. These loans are unsecured, so your rate and borrowing limit hinge on your credit profile (or your cosigner’s, if applicable)

You’ll use all or a portion of the loan proceeds to pay off the balances for debts you want to consolidate. Like a balance transfer credit card, instead of paying each creditor monthly, you’ll now make a single monthly payment on the personal loan to streamline the debt payoff process.


  • Collateral is not required.
  • Funding and approval can be fast from many lenders.
  • Loan amounts range from $1,000 to $100,000.
  • Lower interest rates than credit cards in many cases.


  • Loans can come with fees for origination, late payments and prepaying early.
  • Low rates require excellent credit.
  • Scams are rampant in the debt consolidation loan marketplace.

Debt consolidation loans are generally a good option for those who have good to excellent credit. This is generally considered a credit score in at least the mid-600s and a history of making on-time payments. That being said, bad credit personal loans exist — but the interest rates may be too high to make consolidation worthwhile.

4. Peer-to-peer loan

Peer-to-peer (P2P) lending platforms 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 your credit history is a key factor. The higher your credit score, the lower the interest rate and the more you can borrow.

In addition, eligibility requirements for P2P loans are not always as strict as other types. Some P2P lenders allow applicants to qualify with a lower credit score, so before making a decision, compare the fees and interest rates with other options.


  • Application, approval and funding is generally fast.
  • Initial application uses a soft credit check.
  • Lower credit scores may still qualify.


  • Fees may apply.
  • High interest rates with bad credit.
  • Less time to repay the loan than with credit cards and home equity loans.
  • Potentially higher monthly payments because of shorter repayment terms.
  • Rates are generally higher than those on home equity loans.

P2P loans may be a good fit if you have a lower credit score or limited credit history. But like with a debt consolidation loan, ensure that the total amount you pay is less than what you are already paying your current creditors.

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 — especially as an alternative to bankruptcy.

With a debt management plan, you work with a nonprofit credit counseling agency or a debt relief company 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. You still receive all billing statements from your creditors, so it’s easy to track how fast your debt is being paid off.


  • Credit score can improve over time.
  • Free options from some organizations if you need it.
  • Some of the best loan rates.


  • Credit score will generally lower for a while.
  • Many nonprofit organizations have strict requirements on how you use money while you go through the plan.

Debt management plans are typically a good choice for those who are deep in debt and need help structuring repayment. But you will need to find out whether your debt qualifies for this type of plan.

How to avoid falling into debt

“You need to identify where the debt came from,” advises Celeste Collins, executive director of OnTrack WNC Financial Education & Counseling. “How did this balance get there? You need a comprehensive cash flow plan and to get serious about paying this down,” she adds.

Once you’re out of debt, you can avoid re-entering into a debt cycle with a few financial rules.

  • 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.
  • Save money and try to set aside a certain percentage of your income each month.

How to choose a debt consolidation option

There is no shortage of debt consolidation options. When considering which strategies could work for you, analyze each lender’s interest rates, loan terms and fees. If possible, avoid lenders that cater to consumers with less-than-ideal credit — these lenders offer the highest interest rates and unforgiving loan terms. Even if your credit score is lower, it’s worth shopping around with traditional lenders first by prequalifying to see your predicted eligibility odds.

Always calculate the total cost of your current debts and compare it against the total cost of any consolidation method. This way, you’ll avoid spending more and ensure you’re choosing the best debt consolidation option for your finances.

How to qualify for a debt consolidation loan

If you’re considering applying for a debt consolidation loan, it’s important to understand what’s needed to qualify. Obtaining the most competitive loan interest rates possible typically requires a credit score of about 700. Though having a lower score won’t necessarily disqualify you from approval. Instead, the loan is likely to be more costly.

You’ll also need to show proof of income in order to qualify for a loan. Lenders want to see a reliable form of income available to repay the money you’re seeking to borrow. Steady income also reduces risk in the eyes of lenders. If you’re applying for a larger loan, you may also be asked to provide collateral to secure the loan.

Shopping around and comparing lenders is another important part of the qualification process. This allows you to gather information about the application process and assess whether you’re likely to qualify. Taking this step allows for reviewing fees and repayment terms offered by each lender. It’s also a good idea to go through the step of prequalifying for loans when available. Prequalification doesn’t impact your credit and can provide you with additional details about the loans you may be eligible for.

Alternatives to debt consolidation loans

A debt consolidation loan may not be the right choice for everyone. And depending on your credit score, a debt consolidation loan may not offer the most competitive interest rates or terms.

Among the alternatives to debt consolidation loans is debt settlement. This approach involves making a lump-sum payment to your creditors for an amount less than what you actually owe. This payment would settle your debt. It can be a good choice if you don’t qualify for any of the debt consolidation loan options. But there are also drawbacks, including the fact that debt settlement will impact your credit report for as long as seven years.

Bankruptcy is another option when you’re struggling with debt. However, this should generally be an option of last resort, after you’ve exhausted all other choices. As part of the bankruptcy process, you go to federal court and seek to have your debts entirely discharged or perhaps reorganized so that you are better able to repay them. There are certain types of debt that cannot be discharged however, including student loans and tax debt. And like debt settlement, this approach will impact your credit score for years.