3 Smart Ways to Consolidate Debt

Being weighed down by debt can be stressful. Being weighed down by debt when you have to keep track of multiple loan agreements, lenders and payment plans is even worse.

But that’s the reality for many borrowers. Earlier this year, credit reporting agency Experian reported that in 2023 Americans were shackled with average debt balances of roughly $24,000 in auto loans, $19,400 in personal loans and $6,500 in credit cards, not to mention larger balances from student loans and mortgages. Overall, household debt is at a record high — and if you’re among the many people who owe, you’d probably welcome lower interest rates and a chance to make one monthly payment instead of several.

Debt consolidation can help you do just that. This strategy essentially replaces your multiple debts with one new loan that ideally has a lower interest rate. If your budget is stretched, consolidating could help you get a lower monthly debt payment to free up a little cash for other bills. On the flip side, if you can snag a better interest rate and still pay the same — or more — each month on your debt, consolidating your debt could be your path to a quicker payoff date.

Here’s an overview of three debt consolidation loan options — and who should consider each one.

1. Home equity line of credit (HELOC) or home equity loan

Best for: Homeowners who have significant equity in their home and are willing to take on the risk of using their home as collateral.

More details: The soaring cost of homes may be bad news for prospective buyers, but it’s brought some good news for homeowners: They’re sitting on record high home equity, giving them attractive loan options in a home equity loan and line of credit, or HELOC.

These loans allow you to borrow against your home, even if you are paying down your mortgage. Home equity loans provide a lump sum of cash, while a line of credit gives you a borrowing limit you can tap over a period of years.

“The benefit of borrowing either through a home equity loan or a HELOC is that, because this is a loan using your home as collateral, it’s possible to get interest rates that are lower compared to non-collateralized borrowing options, like credit cards or signature loans,” says Bruce McClary, senior vice president of membership and media relations for the National Foundation for Credit Counseling.

Interest rates currently start around 8%, though your rate will depend on factors like your lender, home value and credit history. Still, there are serious risks to consider.

“The downside is that you’re putting your home on the line and if you do run into trouble repaying the debt, and if the loans go into default, you could face foreclosure,” McClary says.

The exact eligibility requirements will depend on the lender. But a general rule of thumb is that you should have at least 15% to 20% equity in your home, your credit score should be at least 620 (though many lenders will require a higher score) and your debt-to-income ratio — your monthly debt payments compared to your monthly income — shouldn’t be higher than 43%.

If you can snag a lower interest rate than you’re paying on your other debt, this can be a good route to go. But don’t forget about factoring in any closing costs, which will vary by lender but can include origination fees, appraisal fees and more.

2. Balance transfer credit card

Best for: Borrowers with a smaller balance who can pay off their debt within the 0% interest-rate period.

More details: Credit cards are known for having high interest rates. Annual percentage rates (APRs) of more than 20% are common, and some cards have a maximum rate that approaches 30%.

“If you’ve got a big balance on a high-interest card, it’s going to take giant payments for you to even make any progress,” says Glenn Downing, founder and principal of investment advisory firm CameronDowning. But balance transfer credit cards cut you some slack, as they are designed with introductory or promotional rates — even 0%. The idea is that you can transfer your current debts to the new card and pay off the new balance before the 0% APR period is up.

Who wouldn’t say yes to slashing their interest payments, right? The catch is that after the promotional period, you’re subject to the standard terms of the credit card, meaning a sky-high interest rate can come back.

“Roll over what you’re sure you can pay off and get to a zero balance within the specified time period,” Downing says.

Balance transfers tend to come with a fee of between 3% and 5% of the total balance, so keep in mind that you’re going to be increasing your indebtedness initially. Plus credit cards usually have credit limits, and you won’t be able to transfer more than that limit allows. And finally, these card issuers tend to require borrowers to have at least a credit score of 670 or higher (the better the score, the better your chances of scoring one of these cards).

To make sure you don’t get stuck in a cycle of credit card debt, you should first calculate how much you’ll have to pay each month to pay off the balance before the promotional period ends. Then you’ll want to stick with that payoff plan and be disciplined about not racking up new debt on that card after the balance is paid off.

As McClary puts it, “the stars have to align here if you’re going to get the best results.” But if you shop the market and find a card with no interest for a time period like 12 to 18 months, it could be worth it.

3. Personal loan

Best for: People who don’t own a home (or don’t want to tap into their home equity) and have at least a fair credit score.

More details: Another way to ditch your various monthly debt payments and replace them with one loan you can easily keep track of is with a debt consolidation loan, which is a type of personal loan. Banks, credit unions and online lenders will lend you money to pay off your existing loans, often with a lower interest rate than you may be used to. In fact, the personal loan business is booming, in part because Americans are looking for loans to consolidate debt.

The interest rates on these loans can vary dramatically depending on your credit score (lenders usually want to see at least a 580) and your overall financial capacity to pay them back. While you could qualify with bad credit, the interest rate might not be worth it. If you’ve got excellent credit, you may be able to score a rate on the lower end of the spectrum, with rates currently starting around 9%. But if you don’t have a good credit score, you could get offered a rate that’s similar to what you’re paying on your credit card; some lenders have maximum APRs that hit 35%.

Generally speaking, those with higher credit scores will probably get a lower rate than on a credit card, but not as low as you might get with a HELOC.

“There is no collateral here so the lender is likely to manage their risk by offering you a higher interest rate than they would otherwise provide in a collateralized loan,” McClary explains.

Personal loan APRs tend to include origination fees and they can be steep — sometimes as much as 12% of the total loan amount — so you’ll want to run the numbers to make sure the switch is worth it. And finally, if you’re used to just paying the minimum on your credit card, it’s important to be sure you can make the monthly payments on a personal loan. Like other loans, missing them could mean late fees, damage to your credit report and eventually, phone calls from debt collectors.

More from Money:

6 Tips to Make Debt Consolidation Work for You

A 4-Step Guide to Negotiating Credit Card Debt

Debt Snowball vs. Debt Avalanche: Which Payoff Strategy Is Right for You?