Best Ways to Consolidate Debt & Get Finances Under Control

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Oct 04, 2022

Best Ways to Consolidate Debt & Get Finances Under Control

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2022 has been a bumpy financial ride for many, and all indications are that 2023 may be just as chaotic. If you haven’t done so recently, now is an ideal time to review your finances and move with your money to put yourself in the best position possible. If you have a bit of debt from several sources, consolidation could be an option, and you won’t have to touch a retirement account either. Let’s take a closer look at the best ways to consolidate your debt and get your financial situation under control once and for all.

In this article

What is debt consolidation?

Debt consolidation is the process of combining several debts into one single monthly payment and under one single loan term. You can consolidate multiple types of debt, including credit cards, medical payments, and unsecured loans.

If you can consolidate with a lower interest rate than your current rates, you are essentially refinancing your debt and could potentially save money on interest over the life of the loans. Even if your new interest rate is comparable to what you’re already paying, some people find it beneficial to consolidate simply because you only have one monthly payment versus several. The simpler you can make your finances, the easier it can be for you to tackle your debt payoff and be rid of it once and for all.

But debt consolidation does have potential pitfalls too, which you should be aware of before proceeding. For starters, if you don’t obtain the right interest rate, you could end up paying more over the life of the loan versus less. There are fees associated with these loans, and all of the fees should be factored in.

Secondly, if you’re not careful with your money habits, you could end up in further debt. Consolidation should only be considered when you’re ready to change your spending habits and tackle your debt. Otherwise, it won’t be long before you’re back in a similar situation with too many debt payments if you’ve never learned how to manage your finances.

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Best ways to consolidate debt

Let’s look at the various consolidation options.

1. Balance transfer credit card

You may benefit from a balance transfer credit card if you currently have at least two credit card balances with higher interest rates. These cards often include enticing introductory offers for 0% financing for a 9-, 12-, 15-, or even 21-month introductory period. It makes this option hard to beat when you add up the amount of interest you could save and how quickly you can pay off your balance.

Pros

Save hundreds, possibly thousands of dollars in interest charges by paying off the balance before a 0% promotional introductory offer period ends.
Some credit card companies allow you to transfer personal loan debt in addition to credit card debt.
Potentially pay off your balance sooner since you’ll only pay towards the balance, not the interest.
Straightforward process and can be completed quickly.

Cons

There are often steep balance transfer fees, ranging from 3% to 5% per transaction, which could add a hefty sum to your balance.
If you have one late payment, it could jeopardize your 0% introductory rate offer, causing you to owe accumulated interest charges.
Taking on additional credit involves a credit check, which could affect your credit score and show on your credit report.
You may not be approved for a high enough credit limit to cover the existing balances you need to transfer.

2. Debt consolidation loan

A debt consolidation loan is another method of consolidation. This loan is where you receive a lump sum payment to pay off other debts. It’s possible to receive a lower interest rate, which could mean potential savings in interest.

The appeal of the debt consolidation loan is you receive a fixed interest rate, which means a fixed monthly payment amount. Unlike credit cards with variable interest rates that can fluctuate based on the prime rate, you’ll have the same interest rate throughout the life of the loan. You can also shop around for these loans, which means you can find the lower interest rate or most favorable repayment terms for your financial situation.

Pros

Predictable, fixed monthly payments make it ideal for those working within a budget.
Potential to save money in interest charges, especially if you obtain a lower interest rate versus your other high-interest balances.
Allows you to pay off various debts, including medical bills, credit cards, and other loans.

Cons

Requires a credit check, and approval is based on your credit history and credit score. Someone with a good to excellent credit rating will be more likely to be approved with a favorable interest rate.
Substantial fees could be included, ranging from origination fees, balance transfer fees, annual fees, and prepayment penalties. Be sure to evaluate all fees when comparing loans.

3. Line of Credit or Home Equity Loan

Home values have risen significantly across the country, which means you may be able to put your home equity to work for you. If you have a decent amount of equity in your home, at least 15%, then you have two more options for debt consolidation.

A home equity line of credit, or HELOC, is a popular option because you’re extended a credit line based on your home's equity and credit score. You use it like a credit card and borrow it when you need it. Your monthly payments depend on the interest rate and the amount you borrow.

A home equity loan, or HELOAN, also lets you borrow against your home’s equity, but you take out a specific amount and receive a lump sum payment. This means you have fixed monthly payments and a fixed repayment term. You can also add a cash-out option (if approved), making it appealing for a wider range of uses.

Both options allow the use of almost anything, including debt consolidation or debt payoff. The interest rates are typically competitive too.

Pros

May be able to borrow a significant amount, depending on how much equity you have.
Competitive interest rates and loan terms are available.
Use the funds for anything, including debt payments.

Cons

Your house is on the line. If you miss payments, your home is at risk since it’s used as collateral.
High fees, including origination and closing costs, can add thousands to the balance.
Your home value could drop. WIth the economy and housing market volatility, if your home value drops too much, you may be over-extended if you try to sell your home or refinance.

4. Debt Management Plans

Credit counseling companies typically offer debt management plans or DMPs. The idea of a DMP is to restructure your existing unsecured debt, which includes credit cards and personal loans.

The initial part of a DMP involves working with a debt counselor, who creates a plan for you to manage your debts. In addition to financial counseling, the counselors negotiate on your behalf to receive a lower interest rate on your existing debts.

The charge for this service ranges from a monthly payment to a percentage of the amount the company saves you. Meanwhile, you make monthly payments to the credit counseling agency, and they make payments to your creditors on your behalf.

Pros

You can choose an agency specializing in your type of debt, such as credit card debt.
Most offer a free initial consultation so you can evaluate if the service would be valuable for you.
Could reduce the total amount you owe, and the interest you pay over time and help you pay off your debt sooner.
You don’t have the stress of dealing with creditors directly.

Cons

Does not include a restructuring of student loans, medical bills, or taxes.
Your credit score will take a hit initially because your credit utilization will increase since you’re closing debt accounts.
Could involve costly fees.

5. Debt Settlement

Another debt relief option is the use of a debt settlement company. This should only be considered as a last resort because it is such a financially risky option. With this plan, you stop paying your creditors, and the debt settlement company negotiates on your behalf to reduce the amount of debt (not the interest rate). Some companies advertise you’ll only pay pennies on the dollar of what you owe.

This is a risky debt consolidation approach because there is no guarantee that the settlement company will be able to produce results for you. If a settlement agreement is reached, you’re responsible for the taxes since it’s reported as an income.

Get Debt Relief Today Even If You Have Bad Credit with TurboDebt

Relieve $25k+ in Credit Card Debt or Personal Loan Debt With TurboDebt

Relieve $25k+ in credit card debt or personal loan debt with this special relief program.
TurboDebt has a Trustpilot rating of 5/5 based on 1288 reviews
Subject to qualification and approval. $1,500 monthly income required.
Apply in 5 minutes. If you qualify, chat online with a friendly online debt representative.

Apply for Debt Relief Today With TurboDebt!

The Bottom Line

It’s important to understand your numerous options for debt consolidation. There is no one-size-fits-all solution for everyone’s personal finances. The best approach is to evaluate each option, run the realistic numbers, and use the information to make the most appropriate decision. With the right debt consolidation plan, you could end up saving money and achieving your goal of becoming debt free even sooner than you think.

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Sara Coleman is a former corporate gal turned creative entrepreneur. She began writing professionally several years ago and now contributes to multiple websites, blogs, and magazines. She’s also an avid reader and can’t resist a great historical fiction novel. Sara holds a BA in journalism from the University of Georgia and can be found supporting her Bulldogs every chance she has. She resides in Charlotte, North Carolina, with her wonderfully supportive husband and three children. When she’s not ushering her kids to sports and dance lessons, she can be found creating content for her own website, TheProperPen.com.

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