Best Debt Consolidation Loans: Compare Your Options

You're paying four bills on four dates, and the minimums barely dent what you owe. You know you need to do something, but you’re not sure of the right move to make.

Debt consolidation could roll those balances into one payment at a lower rate, so more of your money goes to the debt instead of the interest. And you have a number of different ways you could consolidate depending on your situation.

Here's the part most lender lists skip: The best debt consolidation method isn’t one-size-fits-all. It depends on your credit, your debts, whether you own a home, and how fast you can pay it back.

What debt consolidation is and how it works

Debt consolidation combines multiple balances into one new debt with a single monthly payment, ideally at a lower rate. You can consolidate with a personal loan, a balance transfer credit card, or by borrowing against your home equity. The goal is the same across all the options: One payment, less interest over time, and a clear date when you're done.

The catch: Consolidation only has the potential to save you money if the new rate is lower than what you pay now (and any loan fees don’t eat the rest). Otherwise you're just moving the debt around.

The best ways to consolidate debt

There are a variety of ways to consolidate debt with a new loan, but they can be grouped into two main types: unsecured and secured. Each method fits a different situation, so the question isn't which is best overall—it’s which is best for you.

Here’s how they compare at a glance:

Let’s learn more about each option.

Unsecured personal loan

A personal loan gives you a fixed amount upfront, then you repay it in equal monthly installments over a set term. Unsecured personal loans have no collateral (something of value that backs up the loan), and funding often lands within days. 

Your rate depends on your credit, with higher credit scores generally unlocking lower rates. Some lenders charge an origination fee to cover administrative costs, which often ranges from 0% up to 12% of the loan amount. Origination fees are usually taken out of the amount you receive. Rates vary widely by credit, income, and lender, so compare a few offers.

Balance transfer credit card

A balance transfer card moves your card debt onto a new card with a 0% or low introductory rate for a limited window (typically between 6 to 21 months). The rate jumps to the standard APR once the intro period ends. Most issuers charge a balance transfer fee of 3% to 5% of the transferred amount, which is usually added to your card balance.

Balance transfer cards work best for smaller balances you can clear before the intro window closes. Any balance you have remaining at the end of the intro period will start accruing interest at the standard interest rate.

Home equity loan

A home equity loan pays you a lump sum at a fixed rate, using your home as collateral. This means your home backs up the loan. Since it’s a secured loan, home equity loans tend to have lower rates than most unsecured borrowing options like personal loans. 

This option may fit a homeowner with built-up equity who wants a low fixed rate on a large balance. Lenders generally let you borrow up to about 80% to 85% of your home's value, counting your mortgage, so you keep some equity. 

You're trading unsecured debt for debt backed by your home. If you can't repay, the lender could foreclose on your home.

HELOC (home equity line of credit)

A home equity line of credit, or HELOC, is similar to a home equity loan in that your home is the collateral. Instead of a lump sum, though, you get access to a line of credit. A HELOC may fit ongoing or uncertain costs more than a one-time payoff.

With a HELOC, you can draw money up to your credit limit, repay some or all, and borrow up to your limit again—over and over, during the full draw period. After the draw period, you enter the repayment period and can’t draw anymore.

The interest rate on a HELOC is usually variable, so your payment can rise. If you make interest-only payments during the draw period, your payment could jump significantly when you hit the repayment period. As with a home equity loan, your home could be on the line if you can’t make your payments.

Cash-out refinance

A cash-out refinance replaces your existing mortgage with a bigger one, based on your home equity, and gives you the difference in a lump sum at closing. You can then use that money to consolidate your debts.

This option is worth exploring if you can qualify for a lower rate on the new mortgage than you’re currently paying on your existing mortgage. Make sure to include closing costs on the new mortgage in your savings math.

Your home secures the whole mortgage, including the cashed-out portion, so the foreclosure risk applies here, too. And despite a common myth, the interest on the portion of your new mortgage you use to pay off debt may not be tax deductible. Consult a tax professional if you want to learn more.

Debt consolidation options to avoid

A few other methods could potentially be used to consolidate your debt—but probably shouldn’t be. Here are two common ones:

Retirement account loans

Borrowing from your 401(k) skips the credit check but puts your retirement savings at risk. Leave your job and the balance can come due fast, and an unpaid balance could become a taxable distribution, plus a 10% early-withdrawal penalty if you're under age 59½. You'd trade a debt problem for a retirement one.

Payday and other high-cost loans

These can carry triple-digit APRs and a repayment structure that traps people. More than 80% of payday loans get rolled over or re-borrowed within a month, the opposite of consolidating. The goal is to escape payday debt, not fund your payoff with it.

How to compare your consolidation options

Once you know the methods, compare them on the same factors. Chasing the lowest monthly payment can hide a long term and more interest overall.

Run each option through this checklist:

• Total cost: Add up interest plus fees over the life of the loan, not the monthly number alone.
• Repayment term: A longer term may lower the monthly payment but usually costs more in total interest.
• Secured or unsecured: Secured options can carry lower rates because your home backs them, which could help you save but only if you’re comfortable with the risk.
• Prequalification: Prequalify with a few lenders that use a soft credit check to compare estimated rates before you apply. Soft credit pulls don’t impact your credit like the hard inquiry from an application can.

Where consolidation fits among your debt relief options

A consolidation loan is one tool among several. It's the right one when you can repay what you owe in full and a new loan or balance transfer gets you better terms. 

When that's not your situation, other debt relief options may be a better choice. Here's how the options line up against different situations:

• Consolidation loan or balance transfer: You can repay in full and obtain a lower rate on your own.
• Debt management plan (DMP): A credit counselor rolls your debts into one payment, often at a reduced interest rate. You still repay the full principal over three to five years. May fit if you can afford your debts but need professional guidance.
• Debt settlement: This is distinct from consolidation, not a form of it. You or a company negotiate with creditors to accept less than the full balance. You typically need to be behind on payments and facing financial hardship for this to work.
• Bankruptcy: A legal option when the debt is truly unmanageable. Unsecured debts could be discharged, but any nonexempt assets may be at risk.

These are choices that fit different situations, not rungs on a ladder you climb in order.

Bills Action Plan

1. List every balance you want to consolidate, with its amount, interest rate, and monthly payment. Add them up so you know your target loan amount and the rate you need to beat.
2. Prequalify with a few lenders using a soft inquiry so you can compare estimated rates side by side.
3. Before you commit, confirm the new rate beats your current rates, the fees don’t eat your savings, and the payment fits your monthly budget. If it doesn't, compare your other debt relief options first.

Key Terms

Origination fee: A one-time setup fee some lenders charge for a personal loan, often taken out of the money you receive, so you get a little less than you borrow.

Closing costs: A group of fees often charged by mortgage lenders for home equity loans, HELOCs, or cash-out refinance loans.

Prequalification: A soft-inquiry check that estimates the rate you might get. It doesn't affect your credit score. A full application is a hard inquiry, which can.

Combined loan-to-value (CLTV): How much you owe against your home compared to its value. Lenders cap home equity borrowing at roughly 80% to 85% of that value.

Disclaimer: For general education only. Consult a qualified financial or tax professional for advice specific to your situation.