There’s more than one way to consolidate.

Debt consolidation can make paying what you owe easier by combining multiple bills into one monthly payment. The goal is to reduce or eliminate interest charges applied to your balances, so you can reach zero faster. However, there’s more than one way to accomplish this goal. It’s important to understand your options, so you can choose the best one for your needs.

There are good options and bad ones.

What are the best options to consolidate?

Option 1: Using a debt consolidation loan

The most well-known way to consolidate debt is to use a personal loan. A debt consolidation loan is an unsecured personal loan that you take out to pay off existing debt.

You apply through a bank, credit union, or online lender and get approved based on your credit score. The loan amount should be large enough to pay off your existing accounts. With a good-to-excellent credit score, you can qualify for a loan at the lowest interest rate possible.

Once approved, the funds from the loan are used to pay off your credit cards and any other existing debts or accounts that you wish to pay off. This leaves only the low-interest fixed-rate loan to pay back. Fewer bills mean less stress.

Option 2: Using a debt consolidation program

If you don’t have a good credit score or you owe too much to qualify for a loan, then you’ll generally need help to consolidate. A debt consolidation program is a repayment plan you enroll in through a debt consolidation company.

The company helps you find a monthly payment that will work for your budget. 

What are the worst options to consolidate?

Other solutions serve the purpose of consolidating debt, giving you one monthly payment while minimizing APR. However, one has been shown to have a low chance of success, while the other creates unnecessary risk. Still, in limited cases, these solutions may also work. Just proceed with caution.

Option 3: Using a balance transfer credit card

If you only need to consolidate credit card balances and you owe a relatively low amount, you may consider a balance transfer credit card. This is a specialized type of card that you use to transfer the balances from your existing cards.

The card offers a lower APR on balances you transfer. But the primary benefit is the 0% APR period you can get when you open the card. If you have a good or excellent credit score, you can qualify for 0% APR for up to 6-18 months.

This allows you to pay off your debt interest-free, which can be a huge advantage. However, this option is known to have a very limited success rate. In general, you must owe less than $5,000 for it to be effective. Even so, it requires specific circumstances to be successful.

You need a balanced budget with substantial excess cash flow. That way, you can make the largest payments possible. Otherwise, you won’t be able to eliminate the balance during the interest-free period.

You also need to stop charging on your other credit cards, so you’re not running up new balances while you pay the existing debt off.

Option 4: Using a home equity loan

The last option for consolidating only works for homeowners. It’s called home equity loan. This is a secured loan that you take out using your home as collateral.

You borrow against the equity built up in your home. That’s the appraised value of your home minus the remaining balance on your mortgage. You may be able to borrow up to 80% of the equity you have available.

While home equity loans can be useful for a variety of purposes, they should generally not be used solely to consolidate debt. That’s because converting unsecured debt to secured unnecessarily increases your financial risk. If you default on the loan, you will be at risk of foreclosure. If you’re taking out a home equity loan for another purpose, such as renovating your home or making some repairs, then you can use extra funds to pay off your credit card balances. However, paying off credit cards should never be the primary purpose of borrowing against home equity. It’s just too risky.

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