How to consolidate debt and pinpoint the right approach for you

How to consolidate debt and pinpoint the right approach for you
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If meeting the cost of your debt payments is giving you cause for concern, consolidating your debt so that you reduce the amount of monthly payments going out can prove an effective way to meet the challenge. Bringing a number of high interest loans together into a single low interest loan using the best debt consolidation companies has the potential to save you significant sums in interest fees, and make the task of keeping tabs on your debt far easier. 

In terms of how to consolidate debt, there are various methods from which to choose, from the lower risk unsecured options of the best personal loans online and credit card transfer to the rather higher risk options of home equity loans and 401(K) loans. However, remember that the consolidation of debt is not going to help you change your spending habits, or magically erase your debt. For it to work, you should use consolidation alongside a budget or in conjunction with a debt management plan. 

Unsecured personal loan 

Personal loans are one of the first options if you're wondering how to consolidate debt. As they are unsecured loans, and so are not placed against an item or any collateral, a loan of this type represents a relatively low risk way of bringing your debts together in one place. Loans also have the benefit of offering a low interest rate on debt with a fixed term repayment schedule. 

How to consolidate debt and find the right method for you

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The simplest way to search for a loan is to do so online. In the space of a few clicks, you'll know the terms and interest rates that lenders are willing to offer to you. Consider that there isn't usually a penalty for early repayment, but there may be an origination fee that typically ranges from 1% to 5% of the loan. The best rates will also be reserved for people with a good credit score, so think about credit repair if your credit history has the potential to be improved. 

The more specialized lenders who deal specifically with debt consolidation loans will offer extra services to customers that can help them free themselves from debt - like paying the loan directly to the creditors, to remove any temptation you might have to spend the loan elsewhere.  


  • Fixed-rate interest
  • Lower interest
  • Fixed payment period 
  • Unsecured loan


  • Need good credit for the best rates 
  • There is an origination fee involved

0% balance transfer card 

Zero percent credit card transfers are another low risk method if you're thinking about how to consolidate debt. Balance transfers of this nature are usually used as an introductory offer to get you to switch credit cards. If you switch cards you will then have no interest to pay on the outstanding balance you transferred over for a certain period of time.

How to consolidate debt and pinpoint the right approach for you

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The 0% interest period can sometimes last up to 21 months, making it a good short to medium term way of creating breathing room to find better solutions or to pay off your debt in its entirety. Most credit card companies will charge a balance transfer fee of around 3% at the very start, but by not having to pay interest, this will usually more than cover the outlay over the fullness of time. 


  • Low risk method of debt consolidation 
  • 0% interest will pause interest increases
  • Great for reducing the amount owed


  • Need a good credit score to qualify
  • 3% balance transfer fees
  • Short term solution
  • Not suitable for high levels of debt

Home equity loan or line of credit 

Home owners have potential access to two additional ways of better managing their debts: Home equity loans and home equity lines of credit (HELOC). Both of these methods make use of the equity built up in your home and should be seen as higher risk. They should also only really be considered for larger debts and where the minimal repayments are going to be met. This type of consolidation is secured against your home, so not making payments could result in the loss of your home. 

How to consolidate debt and pinpoint the right approach for you

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A home equity loan is essentially a lump sum payment with a fixed interest rate, while a HELOC allows you to draw on available funds whenever you need. The latter can prove particularly risky for people who already have debt, because it operates much like a credit card that is secured against the home. HELOCs often have variable interest too, making it difficult to predict what you will need to pay back.


  • Doesn't require a good line of credit 
  • Can consolidate a large amount of debt


  • A high risk loan type 
  • Can lose your home 
  • Long repayment term 

401(k) loan

Another high risk option when it comes to how to manage debt is borrowing from your retirement savings. One advantage of borrowing from your 401(K) is that you will be borrowing from yourself, and as such will have no creditor. This means that it will not show up on your credit report. 

How to consolidate debt and pinpoint the right approach for you

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However, generally, borrowing from your retirement funds is not advisable, and doing so might have a big impact on your the quality of life of your retirement. Failure to pay back what you take out can also result in hefty penalties. You'll have to pay taxes on the unpaid balance and so may even end up in a greater amount of debt. You usually have to repay 401(K) loans in five years unless you lose your job or quit. Then you will have a 60 day due.


  • Low interest rate method of borrowing 
  • Borrow money from yourself
  • Isn't counted on you credit report


  • Risking your retirement savings
  • Heavy penalties if you fail to repay loan
  • If you lose your job, you have 60 days to pay
Tim Leonard

With over 20 years’ experience in the financial services industry, Tim has spent most of his career working for a financial data firm, where he was Online Editor of the consumer-facing Moneyfacts site, and regularly penned articles for the financial advice publication Investment Life and Pensions Moneyfacts. As a result, he has an excellent knowledge of almost areas of personal finance and, in particular, the retirement, investment, protection, mortgage and savings sectors.