Alternatives to Debt Consolidation Loans

Debt consolidation loans are personal loans used to merge high interest debts such as credit cards, payday loans or other bills into a brand new fixed rate loan. Once you have received the funds for this loan, they are used to pay off your other debts. If you pay off the loan on time, get a lower interest rate, and don’t incur any additional debt that you can’t handle, you might be able to pay off your debt faster and save a ton of money on interest.

However, while using these loans is a good way to consolidate payments and hopefully lower the interest rate on your debt, there are several debt consolidation loan alternatives for people who don’t. may not qualify for a debt consolidation loan or those looking for lower interest rates. .

Why Debt Consolidation Loans May Not Work

Although debt consolidation may be a good solution for some, it may not work for everyone. For example, consolidating your debts does not guarantee that you will no longer go into debt. If you’re used to living beyond what your budget can afford, you may also need to focus on budgeting for the future.

Additionally, some debt consolidation loans charge various fees including origination fees, late payment fees, and even balance transfer fees. Be sure to calculate the cost of all fees when deciding if a debt consolidation loan is the best solution for your finances.

Finally, you can also pay a higher interest rate on the debt consolidation loan if your credit score is not ideal.

Debt Consolidation Loan Alternatives

A debt consolidation loan is not for everyone. Since debt consolidation loans are unsecured personal loans, lenders may have stricter eligibility criteria or the loans may not be large enough for the types of debts you are trying to consolidate.

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 into one 0% interest rate. This promotional low rate period typically lasts 12-21 months, and a good to excellent credit rating is required for approval. Once the introductory period is over, you will 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, usually 2-5%.

Best for

A balance transfer credit card is good for those with small debt that can be fully paid off within the card’s 0% APR introductory period. Balance transfer cards are also a smart choice for disciplined consumers who won’t go further into debt with a new credit card.

Home equity loan or HELOC

Home equity loans and home equity lines of credit (HELOCs) allow you to borrow against the equity in your home. While a home 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 risk losing your home if you can’t pay them off. Also, both require you to have some equity in your home. Compared to debt consolidation loans, home equity loans and HELOCs often have longer repayment periods, larger loan amounts, and lower interest rates.

Best for

Home equity loans tend to be best for borrowers who are looking to cover major costs and who know exactly how much money is needed. HELOCs are a better option if you need flexibility in the amount of money you borrow and you’re a disciplined borrower who won’t use more money than you can reasonably afford to repay.

Refinancing by collection

A cash-out refinance replaces your existing mortgage with a brand new mortgage for more than your current outstanding balance. You can withdraw the difference between the two balances and use it to improve your home or consolidate your debts. As with using a home equity loan or HELOC, you risk losing your home if you cannot repay your new loan.

Best for

Borrowers whose credit rating is less than optimal can have a better chance of being approved for a cash refinance than some of the other alternatives to debt consolidation loans.

Debt settlement

Debt settlement occurs when you negotiate with your lender to pay less than what is owed to settle the debt. You can negotiate with the debtor yourself or pay a fee to a debt settlement company or lawyer to negotiate on your behalf. Even if you, a lawyer, or a business successfully negotiate a settlement, your credit score can take a hit.

Best for

Debt settlement should generally be one of your last resorts. This will negatively impact your credit for some time, and settlement companies usually charge a fee. And there is no guarantee that a settlement will be negotiated. However, it can be a good choice if you have exhausted other options.


Filing for bankruptcy involves going to federal court to discharge your debts or reorganize them to give you time to pay them off. While you can pay off your medical debt, personal loans, and credit card debt in the event of bankruptcy, paying off your student loans and tax debt is incredibly difficult. Before choosing this alternative, keep in mind that your credit score will take a hit; it may take years for him to recover.

Best for

If you’re looking for a fresh start, bankruptcy may make sense. However, if you use this approach, it’s best to commit to paying your bills on time, budgeting, and avoiding the habits that put you in debt.

The bottom line

While using a debt consolidation loan to merge your high-interest debts might make financial sense if you can get a lower interest rate, it’s not your only option. In some cases, choosing an alternate route may be a better choice. For example, you might be able to get a lower rate by taking out a home equity loan since it’s a secured loan backed against your home.

However, knowing the risks of choosing such an alternative is also important. Shop around the different options and compare interest rates, repayment terms, and the trade-offs you’ll make with each before continuing.

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