5 Best Debt Consolidation Options

Getting out of debt is difficult, especially when you have multiple creditors. If you’re juggling different accounts, payment amounts, and deadlines, you might be considering debt consolidation.

Debt consolidation is the strategy of consolidating multiple debts into one payment. It can save you money in interest, help you pay off debt faster, simplify your finances and give you peace of mind.

1. Balance Transfer Credit Card

You’ll need a balance transfer card with a high enough credit limit to support the balances you roll over and a low enough ​Annual Percentage Rate (APR)​ 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 your debt if you pay off the card before the introductory rate expires and you don’t accumulate new debt.

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

Advantages The inconvenients
  • Faster and easier to get than many other loans
  • Possibility to save money if the debt is paid during the introductory period
  • No collateral is required, so there is no risk of losing assets
  • Doesn’t address bad spending habits that caused debt
  • Typical fees of 3-5% of the amount transferred in addition to the balance
  • APR after introductory period is likely higher than other loans
  • Pull hard on your credit report

Using a balance transfer credit card is best for those who are disciplined and will avoid going into debt on their existing credit cards once the balances are transferred 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 the amount you owe on your mortgage. If you own a home with sufficient equity and a good credit history, you can borrow some of that equity at an affordable rate to consolidate your debt. Many home equity borrowers use the money to pay off higher interest debt, such as credit cards.

Your home equity borrowing options include home equity loans, which give you a lump sum at a fixed rate, and HELOCs, which give you a line of credit you can tap into at a variable rate. Both can be good options for debt consolidation if you have enough equity to qualify.

Advantages The inconvenients
  • 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
  • The house is the collateral that secures the debt
  • Loan interest is not tax deductible
  • Longer financing times on average
  • A longer repayment period can mean higher costs overall

HELOCs are often best for those who have significant equity in their home and prefer a long repayment term. Before opening a HELOC, shop around for the most competitive interest rate. It is also important to be disciplined about your use of a HELOC and debt repayment.

View Home Equity Rates

Leverage 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 your debts if you qualify for a low interest rate, sufficient funds to cover your debts, and a comfortable repayment term. These types of loans are unsecured, so your rate and borrowing limit depend on your credit profile.

Advantages The inconvenients
  • Warranty is not required
  • Funding and approval can be quick from many lenders
  • Loan amounts range from $1,000 to $100,000
  • Lower interest rates than credit cards in many cases
  • Loans may come with origination, late payment and prepayment fees
  • Low rates require great credit
  • Scams are rampant in the debt consolidation loan market

Debt consolidation loans are generally a good option for those with a credit profile that provides favorable interest rates and a borrowing limit that fits all of your debts. You’ll generally need to have a credit score of at least the mid-600s and have made payments on time for the best rates, although personal loans for bad credit are available.

Get pre-qualified

Answer a few questions to see which personal loans you are pre-qualified for. The process is quick and easy, and it won’t affect your credit score.

4. Peer-to-peer lending

Peer-to-peer lending platforms match individual borrowers and investors for unsecured loans typically ranging 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.

Advantages The inconvenients
  • Application, approval and funding are usually fast
  • The 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 pay off the loan than with credit cards and home equity loans
  • Potentially higher monthly payments due to shorter repayment terms
  • Rates are generally higher than home equity loans

Eligibility conditions for loans between individuals are not always as strict as for other types of loans. Some P2P lenders allow applicants to qualify with a lower credit score. Before using this type of loan, compare 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 might be right for you, especially as an alternative to bankruptcy.

With a debt management plan, you work with a nonprofit credit counseling agency or debt relief company to negotiate with creditors and write a repayment plan. You close all credit card accounts and make a monthly payment to the agency, which pays creditors. You still receive all account statements from your creditors, so it’s easy to know how quickly your debt is being paid off.

Advantages The inconvenients
  • Credit score can improve over time
  • Free options from some organizations if you really need them
  • Some of the best loan rates
  • Credit score will usually go down for a while
  • Many nonprofits have strict requirements on how you use the money while on the plan.

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

How to avoid getting into debt

Consumers who have borrowed and spent so much that they need to borrow more to consolidate their debt need to carefully review their spending habits. “You need to identify where the debt is coming from,” says Celeste Collins, executive director of O​nTrack WNC Financial Education & Counseling​ in North Carolina. “How did this balance come to this? You need a comprehensive cash flow plan and take repayment seriously.

Once you are out of the debt hole, you can avoid this predicament again. Here are some rules to follow:

  • Set a budget and stick to it. Live within your means.
  • Avoid impulse purchases.
  • Look for the lowest price before making a big purchase.
  • If you use a credit card, pay the balance monthly to avoid interest charges.
  • Keep your finances organized and monitor your bank balances closely.
  • Stay away from “buy now, pay later” and “interest-free financing” offers, which only defer your debt.
  • To save money. Try to set aside a certain percentage of your income to save it.

Get pre-qualified

Answer a few questions to see which personal loans you are pre-qualified for. The process is quick and easy, and it won’t affect your credit score.

The bottom line

If you need to borrow money to consolidate your debt, avoid subprime lenders who cater to consumers with bad credit – these lenders offer the highest interest rates and ruthless loan terms, and it’s always best to shop with traditional lenders first.

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

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