Monthly bills can be like roaches. You turn on the light every 30 days and they scatter as you try to stomp them.

Wouldn’t it be easier if you just had one roach to chase down?

The Best Way to Consolidate Debt: 3 Steps to Get Started

Before evaluating the best way to consolidate debt, do these 3 things:

  1. Know how much you owe. Pull a copy of your credit report and add up your total debt.
  2. Review your assets including your home, vehicles and other valuables. What do you have and what can you liquidate to pay off your debt.
  3. Review your credit score. How high or low is it and how impactful would it be if it fell.

Millions of consumers have said yes by consolidating debt into one payment. Simply put, they get enough money to pay off those scattering bills all at once. That leaves them with a single monthly payment – the one that pays off the large sum they acquired.

Which raises a couple of questions: How do I get that large lump sum that will allow me to consolidate my debt, and which is the best?

Here are your primary options for debt consolidation programs, each with its pros and cons.

What is the Best Way to Consolidate Debt?

There are many ways to get out of debt. What you choose will depend on your financial situation. It’s important to understand the pros and cons of each option. The best programs will provide the following:

  • Free consultation
  • Low to no fees
  • Minimal impact on your credit score
  • Easy program enrollment
  • Financial peace of mind
  • A road to paying off all of your debt in three to five years

Now, let’s consider the best ways to consolidate debt.

Best Way To Consolidate Debt

Credit Counseling & A Debt Management Plan

A credit counseling service works with creditors to get better terms, including lower interest rates. You make one monthly payment to the company, which distributes those funds to your creditors. Consolidating your debt payments with a debt management plan requires you to cease using your credit cards, live on a budget and pay off your debt in 3-5 years.

Before you can enroll in a debt management program, you must qualify based on your income. If you make too much money, you may not be approved. Conversely, if you make too little money, bankruptcy may be recommended to you by a credit counselor. If you do qualify based on your debt balances and income, your creditors still must accept proposals issued by the credit counseling agency.


There are plenty of nonprofit debt management companies eager to help consumers. The basic requirement is you must have enough income to cover your bills.

All sorts of debt can be addressed, from credit card to medical to unsecured bank loans to rent. The counselor is trained to help educate you about better ways to manage your money and they’ll get debt collectors off your back.

There aren’t any minimum monthly payments. Each one makes a dent in your debt, which is typically paid off in three to five years.


The counselor will study your financial situation and come up with a budget, and you can’t get any new credit cards while on the program. In many cases, this is actually a pro.

There is a fee for the program, so you must do the math and make sure it’s worth it. A comprehensive study by Ohio State University found that consumers in a credit-counseling program significantly reduced their debt and developed better money management skills than consumers who did not receive counseling.

The key is finding a good credit counseling service. For that, to verify that the service is accredited by the National Foundation for Credit Counseling.

When Credit Counseling is a Good Option

Credit counseling is a good option when you are ready to stop using your credit cards, get serious about your budget, reap the benefits of reduced interest rates and get out of debt in 3-5 years. Credit counseling is a good option when you want to consolidate your debt without taking out another loan and without major impact to your credit score. Additionally, with credit counseling, you won’t be putting any of your personal relationships at risk, as you might be when borrowing from family and/or friends.

For more information on credit counseling and to learn how others have paid off their debt, visit InCharge Reviews.

Borrowing From Friends and Family

One way to consolidate your debt is to borrow money from a family member or a friend, pay off your individual debts and then pay off your family or friend over time. Whether or not this is a possibility for you depends on several factors, namely – are you close with someone who has the financial capability to loan you money and be flexible with the repayment amount and term? Do you feel comfortable asking your family or friends for money?

If you are considering asking a friend or family member for help with money, you should be willing to sit down with them, share your budget, debts, monthly payments and interest rates with them. Show them that you can afford to pay them back and how you plan to do that, including highlighting budget areas that you have already cut back or are willing to cut back.

Finally, don’t ask for help from a friend or family member who is struggling financially.

Consider the pros and cons of borrowing from family and friends.


  • Easy: It’s often the easiest way to get money, since you don’t have go to a lender and fill out a lot of forms or be screened.  If your friend or family member charges you interest, chances are it will be lower than whatever you can get from an established lending institution.
  • Low to no Interest: Saving money is a key factor in debt consolidation. Your family and friends are most likely to loan you money with low to no interest.
  • Flexible: A friend or family member might not even charge interest, and the payment schedule will be flexible. They won’t check your credit score, and that score will improve because credit bureaus will show you wiped out all those bills without acquiring any new debt.
  • No origination fees. Most loans include origination fees and other costs. A loan from a family member or friend typically doesn’t. Depending on the size of the loan, this could be a large savings.


  • If you have trouble paying the loan, it could destroy a cherished relationship, damage the high opinion family and friends have of you, trigger a terminal case of the guilts and make for some very strained Thanksgiving dinners.
  • Another con is privacy. You may not want those close to you to know about your financial problems.

When Borrowing from Friends or Family is the Best Option

Borrowing from family and friends to consolidate your debt  is the best option when you know someone who has the resources to help you, is willing to help you, and does not need a swift repayment. You should consider this option when you have a good relationship with someone who wants to help you and forgive the occasional late or missed payment, due to unforeseen events. Additionally, this is a good option when the lender offers lower interest than you are currently paying (or no interest) and a repayment schedule that you can afford, even if it takes you several years to pay off your debt.

Debt Consolidation With A Personal Loan

A personal loan is a loan issued by a bank or credit union, whereby you borrow a specific sum of money and pay it back in installments over a well-defined repayment term, such as 12 months, 24 months, 36 months or 6o months. Personal loans typically have fixed interest rates that vary depending on your credit score and the size of the loan.

A personal loan is a form of unsecured debt, meaning the loan is not backed by any collateral. If you default on a personal loan, you won’t lose anything, unlike if you fail to make payments toward your car loan or mortgage, which are secured debts. However, if you do default on a personal loan and your creditor sues you,  a lien could be placed on your wages.

When you consolidate debt with a personal loan, you borrow money from a bank or credit union, use that money to pay off a number of smaller debts (credit cards, utilities, cell phone, etc) and then one consistent monthly payment to the bank or credit union.


There are a lot of potential lenders, so you can shop around and see which offers the best terms.

Stability comes with having one monthly payment due on a specific date. It’s a methodical and effective way to get out of debt, since you can’t just make minimum payments that don’t put a dent in the total amount owed. Most personal loans are made for three to five years.


Unlike loans from family or friends, lending institutions thoroughly vet an applicant. The worse your credit score, the higher your interest rate will be. You might not even qualify for a loan if you have a poor credit score.

When a Personal Loan is a Good Idea?

A personal loan is a good idea when the interest rate is lower than the average interest rate of your debts and the monthly payment is affordable. For example, if you owe $10,00 in credit card debt at 23.99% interest rate, and you qualify for a personal loan at 10%, you will save $1399 per year or more than $100 per month in interest by taking out a personal loan. If the payment with a personal loan is higher than you can afford, ask for a longer repayment period to bring it down.

Credit Card Consolidation: Balance Transfer

Using credit card balance transfers to consolidate your credit card debt is another way to save money on credit card interest and make progress toward paying down your debt. Here’s how it works. Take higher interest credit card debt and transfer the balance to a credit card that has a lower interest rate. For example, if you have $5000 in credit card debt on a card with a 23.99% interest rate and you can transfer this debt to a 0% card (12-month introductory offer), you’ll save $1200 over 12 months. Most credit cards charge a 3% balance transfer fee. In this case, that’s only $150: still worth filling out the application.

If you are interested in pursuing balance transfer debt consolidation, go online and shop for “low interest credit cards” or “zero percent credit cards.” You don’t need to wait for an offer to show up in your mailbox. Be pro-active and see if you qualify for a credit card with better terms. Before transferring, give your current creditors a chance to lower or match competing offers.


It’s much easier to get a low-interest credit card than a personal loan. If you have a good credit score, credit card companies will inundate you with offers.

A 0% interest rate beats the heck out of the 14%-30% most credit cards charge, and it could save you quite a bit of money.


That low rate is always “introductory,’’ meaning it’s a time bomb that will usually go off in 12-18 months. At that point, the interest rate will jump back to the kind of number you ran from in the first place.

There are usually transfer fees when you put your old debt on a new card, so you must read the fine print and figure out how much you’re actually saving.

Credit card debt is a major factor in figuring a credit score. Unlike a personal loan, credit card consolidation does not wipe that particular debt off your ledger. You’re just moving it around, not eliminating it.

When is a Balance Transfer a Good Idea?

Transferring high-interest credit card debt to lower-interest cards is a good idea when you can save a substantial amount of money on interest, especially if you qualify for low to no interest introductory offer cards. This method is also advantageous if you know that you can make major headway toward paying off your debt during the introductory, low-interest period. Don’t make the mistake of assuming that there will always be a good offer around the corner.

Taking Out A 401(k) Loan

If you have a 401(k) plan at work, you can borrow a portion of it and use the money to pay off other debts. Loans against your retirement plan often must comply with company rules, such as you can only borrow fifty percent of what you have vested, and you have to repay it through a payroll deduction, within 5 years.

You may be required to pay back the borrowed sum with interest (around 5 percent). If you are interested in taking out a 401(k) loan, talk to your benefits administrator and compare payment terms with other consolidation options.


It’s relatively easy to qualify to take out a 401(k) loan since there is no credit check. You’re borrowing from yourself, taking money you’ve put away for retirement.


If you don’t return money from your nest egg, your golden years may consist of bagging groceries eight hours a day.

Pension plans are attractive because they put your money in an investment portfolio. When you take money out, it is no longer making you money. Defaulting on a 401(k) loan will also trigger taxes and penalties, since it would be considered income.

When Borrowing from a 401(k) is a Good Idea

Borrowing from a 401(k) is a good idea when you are young and still have decades to put away money for retirement. It’s also a good idea when you know you can afford the payroll deductions required to pay it back.

Taking Out A Home Equity Loan

A home equity loan is a loan on the equity or money you have saved up in your home. For example, if you purchased your home 10 years ago for $150,000 and it is now worth over $200,000, you may have an additional $50,000 in home equity that you could tap into to pay off your debts. Home equity loans are among the lowest interest (3-5%) and longest repayment schedule loans (15-30 years) a person can access, making the monthly payments significantly lower and more affordable than other kinds of debt consolidation.

You can take out a home equity loan from a bank, credit union, mortgage broker or online lender like SOFI. The terms of the loan will depend on your credit score, how much equity you have in your home and your debt-to-income ratio. Some home equity loans have fixed interest rates and fixed monthly payments. Others are variable rate with a fixed period of time where you can make lower, interest-only payments (typically 10 years).


Low and stable interest rates, and the interest you pay is typically tax deductible. There is a set payment schedule that does not allow those token minimum payments. You can wipe all credit card debt off your credit score.


You’re putting your house at risk. If you default on this one, you could lose the roof over your head.

When a Home Equity Loan is a Good Idea

A home equity loan is a good idea when your home has appreciated significantly since purchase, when you own more than 20 percent in equity (thus, avoiding the added expense of private mortgage insurance) and when you have made a commitment to yourself to not run up additional debts after taking on the loan.

You should be very careful not to get into a cycle of borrowing against your home every 5 years. As a one-time “get out of debt card,” a home equity loan can be the most affordable option. Remember, you want to be in a position that by your 60s and certainly by your 70s, your home is paid off.

Borrowing from a Life Insurance Policy

A lesser known option for consolidating your debt is to borrow money from a life insurance policy. You can borrow up to the cash value of the policy, use the money to pay off several smaller debts, and then make payments to your life insurance policy. You may not need to repay the borrowed sum, but understand that your death benefit will be reduced by however much you borrowed.


If paying your debt off is more important to you and offers you more peace of mind than having a robust death benefit, then borrowing from your life insurance policy may be a good idea.


Life insurance is designed to give you peace of mind and help your family manage the loss of you, your spouse or another family member. If the death of the insured family member would be catastrophic to the family’s finances, you should restrain yourself from borrowing against a life insurance policy. Consider the other options available to you on this page before going down this road.

When Borrowing from a Life Insurance Policy is a Good Idea

Borrowing from a life insurance policy could be a good idea if the policy has significant cash value, and if you or your family would not be financially devastated by the loss of the insured, with a reduced or no pay-out. This option may be preferable to bankruptcy, if none of the other options detailed are feasible.

Debt Consolidation through a Payday Loans

A payday loan is a short-term, high-interest loan, often for a low dollar amount (less than $1000). Because annual interest rates for payday loans can be as high as 1000%, there is no scenario where a payday loan would help you consolidate debt, save money or pay off your debt faster.


Payday loans have no advantages over other, lower interest, longer repayment term loans available. Payday loans are expensive and risky and will put you in a worse financial situation than simply defaulting on your credit card and other debt.

There are no situations under which we can recommend payday loans. If you can’t buy food, pay for utilities or rent, find a food bank, go to a church or other nonprofit organization and ask for help.

No-Credit-Check Installment Loans are similar to payday loans and come with extremely high interest rates as well (200%). Don’t consolidate other, lower interest rate debts with this kind of loan. You’ll find yourself in a deeper hole, buried by interest and likely unable to make your payments.


(Roll, S. and Moulton, S.)(2016, April 12). The NFCC’s Sharpen Your Financial Focus Initiative Impact Evaluation. Retrieved from

(Jacobs, Deborah)(2013, Mar. 25). Think Twice Before Lending Money To Family. Retrieved from