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5 best debt consolidation options

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Thomas Barwick/Getty Images

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Getting out of debt is challenging, especially when you have multiple creditors. If you are juggling different accounts, payment amounts and due dates, you may be considering 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.

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

Pros Cons
  • 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 any poor spending habits that caused the debt
  • A typical fee of 3 to 5% 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 are disciplined and will avoid running up debt on 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)

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.

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 can be good options for debt consolidation if you have enough equity to qualify.

Pros Cons
  • 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. Before opening a HELOC, shop around to get the most competitive interest rate. It’s also important to be disciplined about your use of a HELOC and repayment of the debt.

View home equity rates

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

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 types of loans are unsecured, so your rate and borrowing limit hinge on your credit profile.

Pros Cons
  • 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 a credit profile that allows for securing favorable interest rates and a borrowing limit that accommodates all of your debt. You’ll generally need to have a credit score at least in the mid-600s and a history of making on-time payments for the best rates, although bad credit personal loans do exist.

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 loan

Peer-to-peer 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 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 Cons
  • 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

Eligibility requirements for peer-to-peer lending are not always as strict as other types of borrowing. Some P2P lenders allow applicants to qualify with a lower credit score. Before using this type of loan, compare the fees and interest rates with other options.

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.

Pros Cons
  • Credit score can improve over time
  • Free options from some organizations if you really need it
  • Some of the best loan rates
  • Credit score will generally lower for a while
  • Many non-profit 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

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,” says Celeste Collins, executive director of O​nTrack WNC Financial Education & Counseling​ in North Carolina. “How did this balance get there? You need a comprehensive cash flow plan and to get serious about paying this down.”

Once you’re 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 that cater to consumers with bad credit — these lenders offer the highest interest rates and unforgiving loan terms, and it’s always better to shop around with traditional lenders first.

Also, take every precaution to make sure that your lender is legitimate. Check to see if a lender is registered in the state you live in. Look for this information at the lender’s website or contact your state’s attorney general’s office for further verification.

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Written by
Libby Wells
Contributing writer
Libby Wells covers banking and deposit products. She has more than 30 years’ experience as a writer and editor for newspapers, magazines and online publications.
Edited by
Loans Editor