5 best debt consolidation options

Debt consolidation involves rolling multiple credit accounts into a single loan or line of credit. This strategy can help you save money in interest and pay off your debts faster while simplifying your finances. That said, there are several ways to go about it, each with pros and cons that should be weighed before making a choice.

Debt consolidation options

There are several ways to consolidate debt, including the following.

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, usually 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.

Pros

• Quicker and easier to get than other options
• Interest-free introductory period
• No collateral required

Cons

• Doesn’t address poor spending habits
• A typical fee of 3 to 5 percent of the amount transferred
• High APR after the intro period

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.

The primary options available to homeowners are home equity loans and home equity lines of credit (HELOCs). Home equity loans give you a lump sum of money at a fixed rate, while HELOCs 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.

Pros

• Fixed and variable rates available
• Large loan amounts with long repayment terms
• Lower interest rates than credit cards or personal loans

Cons

• Secured by your home
• Interest is not tax deductible
• Longer repayment timeline can mean higher costs

HELOCs are often best for those who have significant equity in their home and prefer a long repayment timeline. That 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 co-signer’s credit, if applicable).

With how debt consolidation loans work, you’ll use all or a portion of the loan proceeds to pay off the balances for the 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.

Pros

• Collateral is not required
• Many lenders offer fast funding and approval
• Loan amounts range from $1,000 to $100,000
• Typically lower interest rates than balance transfer credit cards

Cons

• May include origination fees or prepayment penalties
• Low rates require excellent credit
• May be difficult to qualify for with poor credit

Debt consolidation loans are generally a good option for those with 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 with 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.

Pros

• Application and approval are generally fast
• Initial application uses a soft credit check
• Lower credit scores may still qualify

Cons

• May include origination and application fees
• Potentially high interest rates
• Rates are generally higher than other debt consolidation options

P2P loans may be a good fit if you have a lower credit score or limited credit history. But like a debt consolidation loan, be sure 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 your 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

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

Cons

• Credit score will generally lower for a while
• Many nonprofit organizations have strict requirements
• May take two or more years to complete

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

Reasons to consolidate your debt

Consolidation comes with multiple benefits that are worth considering if you’re struggling with debt, including streamlining your payments and potentially lowering your interest rate.

• Streamlined payments: When you consolidate outstanding debt balances into a loan or credit card product, you’ll only make one monthly payment, which can simplify your budget.
• Lower interest rates: Consumers with good or excellent credit scores generally qualify for competitive interest rates on debt consolidation loans.
• Fixed repayment schedule: A debt consolidation loan gives you a set payment schedule and predictable monthly payments.
• Credit boost: When you make timely payments on your debt consolidation loan or credit card, positive payment history is added to your credit history.
• Faster debt payment: Securing a lower rate could also help you kick debt to the curb faster.

How to choose the best debt consolidation option for you

When considering debt consolidation strategies, check your credit score and the types of debt you need to consolidate along with their balances, interest rates and monthly payments. This will help you better understand the type of loan you’ll need.

For instance, if you’re trying to consolidate about $5,000 worth of credit card debt and have good or excellent credit, a balance transfer credit card could be the best option. On the other hand, if you have less-than-stellar credit and a considerable amount of debt, then a home equity loan could be a better option.

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

The bottom line

Consolidating your debt is a strategy that can save you thousands of dollars in interest and help you get out of debt faster. The best debt consolidation option will depend on your unique situation, including your credit score and whether you want to risk your home’s equity.

To decide which option might best fit your needs, compare the total borrowing costs of several consolidation methods, such as balance transfer credit cards, home equity loans and debt consolidation loans. Once you have this information, you can start shopping rates to find the best option for your finances.