Key takeaways
- Debt consolidation loans may not be the best option for every financial situation.
- Balance transfer credit cards, home equity loans and home equity lines of credit (HELOCs) are ways to consolidate that may be less expensive in some cases.
- Debt settlement and bankruptcy are costly options both in terms of money and financial health, and should be carefully researched.
Debt consolidation loans are personal loans used to combine multiple high-interest debts into a single loan with a fixed rate and repayment term. The main goal of these loans is to help you save money on interest and streamline repayment so your debt is more manageable.
But debt consolidation loans aren’t for everyone, as they’re largely issued based on creditworthiness, among other factors. Still, there are several options you can explore for debt consolidation without a loan.
Debt consolidation loan alternatives
A debt consolidation loan is not right for everyone. Because debt consolidation loans are unsecured personal loans, lenders may have tighter eligibility requirements or may not be large enough for the types of debt you’re trying to consolidate.
Budget adjustment
Before applying for a debt consolidation loan, it’s important to assess whether the issue can be resolved with a few minor tweaks to your budget.
It can be as simple as getting rid of subscriptions you no longer use, revising an old cell phone or internet plan to see if there’s a cheaper alternative available, or swapping name brands for the storebrand when going shopping. Although this may not seem as much, you could free up a chunk of cash flow that can then be allocated to paying off your debts faster.
- Best for: tackling small debts
- Reason: By cutting a few expenses here and there, it’s likely that you won’t be able to free up more than a couple hundred dollars a month. That’s why this approach is better suited for those looking to pay off smaller debts.
Balance transfer credit card
A balance transfer card allows you to transfer debt from other credit cards — usually credit cards from other companies only — or use a balance transfer check to combine other forms of debt at a 0 percent interest rate. This low promotional rate period typically lasts from 12 to 21 months, and a good to excellent credit score is needed for approval.
Once the introductory period ends, you’ll be responsible for paying the card’s standard interest rate on the remaining balance. Additionally, most cards will charge you a balance transfer fee on the total amount you transfer, typically from 2 to 5 percent.
- Best for: credit card debt
- Reason: A balance transfer credit card is good for those who are mainly struggling with credit card debt, as you will be able to consolidate multiple of these with this approach. Balance transfer cards are also a smart choice for disciplined consumers who will not get into deeper debt with a new credit card.
Home equity loan or HELOC
Home equity loans and HELOCs allow you to borrow against the equity in your home. While a home equity loan has fixed monthly payments at a fixed interest rate, a HELOC works like a credit card and has a variable interest rate. Both can be used to consolidate high-interest debt, but you’ll risk losing your home if you can’t pay them back.
Also, both require that you have a certain amount of equity in your home. Compared with debt consolidation loans, home equity loans and HELOCs often have longer repayment periods, larger loan amounts and lower interest rates.
- Best for: budget-minded individuals
- Reason: Home equity loans tend to be best for borrowers seeking to cover significant costs and who know exactly how much money is required. HELOCs are a better option if you need flexibility in the amount of money you’re borrowing.
Cash-out refinance
A cash-out refinance replaces your existing mortgage with a brand-new one that’s larger than your current outstanding balance. You can withdraw the difference between the two balances and use it to improve your home or consolidate debt. As with using a home equity loan or HELOC, you’ll risk losing your home if you can’t repay your new loan.
- Best for: borrowers with less-than-perfect credit who own a home
- Reason: Borrowers with fair or poor credit may have a better chance of getting approved with more favorable terms for a cash-out refinance than some of the other alternatives to debt consolidation loans. However, this approach is best for those with a significant amount of debt due to the complexity of the process.
Debt settlement
Debt settlement occurs when you negotiate with your lender to pay a lower amount than what’s owed to satisfy the debt. You can negotiate with the debtor yourself or pay a fee to a debt relief company or lawyer to negotiate on your behalf.
But even if you, a lawyer or a company successfully negotiates a settlement, your credit score may take a hit. This is especially true considering that most lenders won’t renegotiate your debt unless you’re significantly behind on payments.
- Best for: those with $10,000 or more worth of debt, struggling with monthly payments
- Reason: Debt settlement will impact your credit negatively for several years. Debt relief companies also charge fees of between 15 and 25 percent of the debt enrolled, which may cut your savings. There’s also no guarantee a settlement will be negotiated, so you could be liable for late fees and additional interest. That said, if you’re swamped in debt, and the other alternative is bankruptcy, then this may be something to explore.
Debt management plan
Debt management plans are offered by credit counseling agencies. They involve working closely with a counselor, who will evaluate your debt and the best approach to tackle it. Typically, the counselor will contact your creditors in an attempt to make your debt more manageable by either lowering your interest rate or monthly payment or by settling your accounts.
You’ll make monthly payments to an account created by the credit counseling agency, and they will pay your creditors. Additionally, you will be provided with tools to help you stay out of debt.
- Best for: Those with overwhelming debt looking for an alternative to debt settlement
- Reason: Just like debt settlement, debt management plans are designed for consumers who are really struggling with their debts. Although these plans can also impact your credit, they are a cheaper and less damaging alternative to debt settlement.
Bankruptcy
Filing for bankruptcy involves going to a federal court to discharge your debts or reorganizing them to give you time to pay them off. Although you can discharge your medical debt, personal loans and credit card debt in bankruptcy, it’s incredibly difficult to discharge federal student loans and tax debt.
Before you choose this alternative, remember that your credit score will suffer a major blow that can take years to recover.
- Best for: those who have exhausted all other options
- Reason: If you want a fresh start, bankruptcy may make sense. However, if you use this approach, it’s best to commit to paying your bills on time moving forward, establishing a budget and avoiding the habits that got you into significant debt.
The bottom line
While using a debt consolidation loan to merge your high-interest debt can make sense financially if you can secure a lower interest rate, it’s not your only option. In some cases, choosing an alternative route can be a better choice. For example, you might be able to secure a lower rate by taking out a home equity loan since it’s a secured loan backed by your home.
However, knowing the risks of choosing such an alternative is also important. Shop different options and compare the interest rates, repayment terms and trade-offs you’ll make with each one to calculate how much you’ll actually save before proceeding.
