5 Best Debt Consolidation Options And How To Choose

Debt consolidation can be an excellent tool to help you manage debt, boost your credit score and simplify your bill-paying schedule. You can opt for a secured option if you own a home or pick from a variety of unsecured loan options that could allow you to repay your debt on a fixed schedule.

1. Debt consolidation loans

A debt consolidation loan could be a wise choice if you qualify for a low interest rate, want to get rid of revolving debt or want a definite payoff date for the money you owe. These loans are typically unsecured, so your interest rate and borrowing limit hinge on your credit profile (or your co-applicant’s, if you have one).

To understand how debt consolidation loans work, you need to understand the basics of installment loans. You receive all of your funds at once, use the funds to pay off multiple debts and end up with a single monthly payment. With a debt consolidation loan, you use your funds to pay back your current creditors, then start making a single monthly payment toward your new lender.

Good option if you…

• Have good-to-excellent credit (or a cosigner who does), meaning a credit score in at least the mid-600s and a history of on-time payments.
• Want to pay off credit cards so you don’t have to take out bad credit personal loans in the future.
• Have goals for getting off the credit card merry go round to improve your credit score.
• Work with a lender that offers discounts and doesn’t charge origination fees.

Next step: Estimate borrowing costs using a personal loan calculator. If you’re not sure about your potential interest rate, prequalify with at least three lenders receive quotes without a hard credit check.

2. Balance transfer credit cards

The best balance transfer cards often come with no or low interest for an introductory period, usually between 18 and 21 months. These cards allow you to move balances from high-interest rate credit cards and other debt to the new card. The idea is to pay the entire balance before the introductory period ends and interest charges begin to accrue. Otherwise, you risk racking up even more interest than you started with.

Good option if you…

• Have good-to-excellent credit to qualify for a card with a high-enough limit to accommodate your cumulative debt.
• Can afford to pay the entire balance off within the promotional period. 
• Make a plan to pay off the debt before the credit card’s introductory rate expires.
• Can save more than you’ll pay in balance transfer fees. 

Next step: Use a credit card balance transfer calculator to see how long it would take to zero your debt. Remember to account for the balance transfer fee when estimating your potential savings.

3. Home equity products

Your home equity is the difference between your home’s appraised value 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 a competitive rate to consolidate your debt.

There are two primary debt consolidation options available to homeowners:

Both products act as second mortgages, which means you’ll add another monthly mortgage payment to your plate. The key to remember is that home equity loan payment amounts don’t change during repayment, while HELOC payments can rise or fall, bringing uncertainty to your budget.

A home equity loan might be the more logical choice for debt consolidation. You’ll have the same predictable payments as a personal loan, but with the option to spread the payment out much longer than personal loans allow.

Good option if you…

• Have significant equity in your home and prefer a long repayment timeline.
• Are comfortable using your home as collateral for the loan — which leaves it vulnerable to potential foreclosure if you can’t repay the loan.

Next step: Input your details into a home equity loan calculator to estimate your borrowing capacity. 

4. Peer-to-peer loans

Peer-to-peer (P2P) lending platforms pair borrowers with individual investors for funding that generally ranges from $2,000 to $50,000. Like personal loans, P2P loans are unsecured, so your credit history is a key eligibility factor. The higher your credit score, the lower the interest rate and the more you can borrow.

In addition, eligibility requirements for P2P loans aren’t always as strict as other financing types. Some P2P lenders allow applicants to qualify with a lower credit score, but be wary of higher fees and interest rates. And like with a debt consolidation loan, confirm that the total amount you pay for a P2P loan would be less than what you are already paying your current creditors.

That said, peer-to-peer loans tend to have multiple fees, including origination fees, that will impact the total cost of your loan. Lenders tend to charge more in interest, and while they’re easier to qualify for than some other debt consolidation options, expect a slower funding timeline.

Good option if you…

• Have a lower credit score or limited credit history — and can’t get a better deal elsewhere.
• Value the ease of potentially getting multiple investor offers (but realize this is not a substitute for shopping beyond a single marketplace).
• Identify a P2P lender that doesn’t charge exorbitant fees.
• Don’t mind the potentially slower funding process (as compared to personal loans).

Next step: Before resorting to a P2P loan, you might work to improve your credit. This way, you can qualify more easily, increase your odds of a lower APR and potentially open up other debt consolidation possibilities.

5. Debt management plans

If you want debt consolidation options that don’t require taking out a loan or credit card, a debt management plan (DMP) could be right for you — especially as a way to avoid bankruptcy.

With a debt management plan, you work with a nonprofit credit counseling agency 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 on your behalf.  

Note that a debt relief company is different from a counseling agency, typically offering the service of pursuing debt settlement.

Good option if you…

• Are deep in debt and need help structuring repayments.
• Have unsecured debt that qualifies for a DMP.
• Earn sufficient income to repay at least some of your debt.
• Don’t mind the three-to-five-year debt payoff timeline of DMPs.

Next step: Research nonprofit credit counseling agencies that have gained approval of the Department of Justice.

How to choose the best debt consolidation method

A good first step: 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 $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’re a homeowner with less-than-stellar credit and a considerable amount of debt, then a home equity loan could be a better choice.

Regardless of the route you choose, always calculate the total cost of your current debt repayment and compare it against the total cost of any consolidation method or alternative option. This way, you’ll choose the best debt consolidation lender and option for your finances.

What’s your next step?

Identify the best way to consolidate debt, once and for all. Because the best debt consolidation option will depend on your unique situation, including your credit score and whether you want to borrow against your home’s equity, it may be time to take an honest look at your budget and calculate how much debt you’re paying compared to your income to make sure you can afford whatever debt consolidation option you choose.