What’s my best option for consolidating debt?

If you’re struggling with high interest rates on credit cards and loans while  barely making a dent in your debt each month, it may be time to consider debt consolidation. That’s a strategy where you roll multiple debts into one monthly payment at a lower interest rate to pay down your debt more quickly. Here are your options for consolidating debt.

There are several options — a debt consolidation loan, a personal loan, a balance transfer on a credit card, a home equity loan or borrowing money from friends or family. Which one makes sense for you will depend on the type of debt you have, how you ended up in debt, your credit score and your financial goals.

Related article: Considering a debt consolidation loan? Here’s what to look for

Consolidating debt with a home equity loan or auto loan

Debt consolidation is specific to one type of debt: unsecured debt. That means debt like credit card balances, medical bills and student loans that aren’t tied to collateral such as your house or car.

Debt consolidation doesn’t lower the principal amount you owe, but it lowers your overall payments by reducing your interest rate. That’s why it makes the most sense for high-interest debt like credit cards.

That’s also why Michael Bovee, co-founder Resolve, cautions against borrowing against your house or car through an auto or home equity loan.

“I would not look to that first,” he says. “I would see if you can get some comparable rates with an unsecured loan.”

Secured loans tend to have lower interest rates than credit cards, but the big risk is that you could lose your house or car if you can’t make the payments. That’s not a risk with credit card debt. An unsecured loan also is not tied to collateral. The downside is that unsecured loans can be harder to get, especially if you have poor credit, and your interest rate will likely be higher.

Consolidating debt with a balance transfer credit card

You’ve probably gotten one of these offers in the mail — a credit card with a 0% introductory rate that lets you transfer balances from other credit cards. That’s an option if you’re looking to consolidate your credit card debt.

The danger is that these offers are temporary. If you can’t pay off most or all of your debt by the time the introductory rate expires, you’ll be back to paying high interest rates again. The amount of debt you transfer also may be capped by your credit limit. The potential upside with this option is you could pay down your debt without paying any interest.

Consolidating debt with a debt management plan

If you feel like you need professional guidance to consolidate your debt, working with a credit counseling company might be a good idea.

These organizations offer education on consumer credit, budgeting and debt management, and can put you on a debt management plan (DMP). With a DMP, a credit counselor negotiates with your creditors to lower your interest rates and/or fees and penalties. Then you make one monthly payment into an account held by the counseling agency, and the counselor pays your creditors.

“Those don’t hurt your credit. They can help preserve your credit. Just know that your credit cards enrolled in a DMP will get closed, but you can reopen accounts later,” Bovee says.

A DMP is not a loan, and Bovee warns that there is “not a lot of wiggle room” in a credit counseling company’s plan for you, which typically lasts up to five years. You have to know you can make these payments. If you miss one, you could end up back where you started with high interest rates.

Related article: What you need to know about debt settlement vs. debt consolidation

Personal loan or borrowing from friends and family

If you want to get your debt paid off more quickly, you might consider getting a personal loan from a lender or borrowing money from friends or family.

Your credit score and how quickly you need the money will determine which option is more viable. If your credit score is below 680, it might be hard to get a personal loan, says Christopher Viale, president and CEO of Cambridge Credit Counseling. Even if you are approved for a loan, the interest rate might be similar to what you’re paying on your credit cards.

However, a personal loan has one advantage.

“At least it’s a term loan and the interest is not going to continue to compound,” Viale says.   

Mixing money and personal relationships is tricky. If you do get a loan from a friend or family member, treat it officially and write down the terms.

Going forward

The debt consolidation option you choose should help you pay down debt while staying within your budget. You also have to be careful not to fall back into old habits. But don’t  close all your credit accounts. Close your newest cards, Bovee says, and be careful with your future credit spending.

“Think about how hard you worked to get out of debt,” Viale says, “and don’t go back.”

Related article: 5 keys to successful debt consolidation