Debt Consolidation Options Compared: Which One Is Right for You?

Debt consolidation sounds simple: combine multiple debts into one. But there are half a dozen ways to do it, and choosing wrong can cost you thousands—or make things worse.

Here's an honest comparison of every major consolidation option, so you can pick what actually works for your situation.

Why Consolidate?

The core problem: Multiple debts mean multiple payments, multiple due dates, multiple interest rates—usually high ones.

Consolidation solves:

• Simplification (one payment instead of many)
• Lower interest (usually)
• Faster payoff (if you don't extend terms)
• Better cash flow (lower monthly payment)

Consolidation doesn't solve:

• The spending habits that created the debt
• Discipline to not run up new debt
• Debt that's already unmanageable

Consolidation is a tool. Used right, it accelerates payoff. Used wrong, it just delays the problem.

The Options at a Glance

Now let's dig into each one.

Option 1: HELOC (Home Equity Line of Credit)

How it works: Open a revolving credit line secured by your home. Draw what you need, pay off high-interest debt, repay the HELOC at a much lower rate.

Typical terms:

• Rates: 8-10% (variable, tied to Prime)
• Draw period: 10 years
• Repayment period: 10-20 years
• Loan-to-value: Up to 80-85%

Example:

• Credit card debt: $35,000 at 23% average
• Monthly card payments: $875
• HELOC amount: $35,000 at 9%
• New payment: $445 (interest-only) to $700 (15-year payoff)
• Monthly savings: $175-$430
• Total interest saved: $20,000+ over payoff period

Pros:

• Lowest rates for most homeowners
• Flexible—draw what you need
• Interest-only payments available during draw period
• Large amounts available (based on equity)
• Interest may be tax-deductible (consult tax advisor)

Cons:

• Home is collateral (risk of foreclosure if you default)
• Variable rate (payments can increase)
• Requires equity and decent credit
• Closing costs ($0-$2,000 depending on lender)

Best for: Homeowners with significant equity, stable income, and discipline to not re-run credit cards.

Option 2: Home Equity Loan

How it works: One-time lump sum loan secured by your home. Fixed rate, fixed term, fixed payment.

Typical terms:

• Rates: 8-11% (fixed)
• Terms: 5-30 years
• Loan-to-value: Up to 80-85%

Pros:

• Fixed rate = predictable payments
• Fixed payoff date
• Same low rates as HELOC
• Large amounts available

Cons:

• Less flexible than HELOC (lump sum only)
• Home is collateral
• Closing costs often higher than HELOC
• Can't re-borrow as you pay down

Best for: Homeowners who want payment predictability and a defined payoff timeline.

Option 3: Cash-Out Refinance

How it works: Replace your existing mortgage with a larger one, take the difference in cash, pay off debts.

Example:

• Current mortgage: $250,000
• Home value: $400,000
• New mortgage: $320,000 (80% LTV)
• Cash out: $70,000 (minus closing costs)

Typical terms:

• Rates: 7-9% (fixed, 30-year)
• Loan-to-value: Up to 80%
• Closing costs: 2-5% of loan amount

Pros:

• Lowest rates of any option (mortgage rates)
• Longest terms (lowest payment)
• Very large amounts available

Cons:

• Significant closing costs ($5,000-$15,000+)
• Restarts your mortgage clock (more interest over life of loan)
• Only makes sense if current mortgage rate is similar or higher
• Home is collateral

Best for: Homeowners with very large debt ($50,000+), when mortgage rates are favorable, or already planning to refinance.

Watch out: If your current mortgage is at 3-4%, a cash-out refi at 7-8% is probably a bad trade. You'd be increasing your mortgage rate AND adding debt.

Option 4: Personal Loan

How it works: Unsecured loan from a bank, credit union, or online lender. Fixed rate, fixed term, fixed payment.

Typical terms:

• Rates: 8-20% (based on credit score)
• Terms: 2-7 years
• Amounts: $5,000-$100,000

Rate by credit score:

Pros:

• No collateral required
• Fixed rate and payment
• Fast funding (often 1-3 days)
• No home equity needed
• Defined payoff date

Cons:

• Higher rates than secured options
• Rates can be steep with lower credit
• Origination fees (1-8%)
• Smaller amounts than home equity options

Best for: Non-homeowners with good credit, or homeowners who don't want to use home equity.

Option 5: Balance Transfer Credit Card

How it works: Transfer existing card balances to a new card with 0% intro APR (usually 12-21 months). Pay off during promo period.

Typical terms:

• Intro APR: 0%
• Transfer fee: 3-5% of amount transferred
• Promo period: 12-21 months
• Post-promo APR: 20-26%

Example:

• Debt: $12,000
• Transfer fee (3%): $360
• Monthly payment to clear in 18 months: $686
• Interest paid: $0 (vs. $4,000+ at 22%)

Pros:

• 0% interest during promo
• Can save thousands on interest
• No collateral

Cons:

• Need excellent credit (700+) for best offers
• Transfer fee adds to balance
• Dangerous if not paid before promo ends
• Temptation to keep using old cards

Best for: People with excellent credit who can definitely pay off balance within promo period.

Option 6: Debt Management Plan (DMP)

How it works: Work with a nonprofit credit counseling agency (NFCC member). They negotiate lower interest rates with your creditors. You make one monthly payment to the agency; they distribute to creditors.

Typical terms:

• Negotiated rates: 6-9% (down from 20%+)
• Term: 3-5 years
• Setup fee: $0-75
• Monthly fee: $25-75

Pros:

• Works with fair/poor credit
• Significantly reduced interest rates
• Professional support and accountability
• One simple payment

Cons:

• Accounts closed during plan
• Note on credit report (not as severe as bankruptcy)
• Can't use credit cards during plan
• Takes discipline to complete

Best for: People with fair/poor credit, overwhelming debt, and need for structured support.

Option 7: 401(k) Loan (Last Resort)

How it works: Borrow from your own retirement account. Repay with interest back to yourself.

Typical terms:

• Amount: Up to 50% of balance or $50,000 (whichever is less)
• Rate: Prime + 1-2% (to yourself)
• Term: 5 years
• No credit check

Pros:

• Interest goes back to your account
• No credit check
• Fast access

Cons:

• Miss retirement growth (biggest cost)
• If you leave job, full repayment often due in 60 days
• If you can't repay, treated as withdrawal (taxes + 10% penalty)
• Doesn't address underlying spending issues

Best for: Rarely. Only when all other options exhausted and you need to avoid bankruptcy.

Side-by-Side Comparison: $30,000 Debt

Let's consolidate $30,000 in credit card debt at 22% average rate.

Winner for homeowners with equity: HELOC or Home Equity Loan Winner for excellent credit, fast payoff: Balance Transfer Winner for lower credit: Debt Management Plan

How to Choose

Choose HELOC if:

• You own a home with equity
• You want lowest rates and flexibility
• You're disciplined about not re-running cards
• You prefer lower payments with option to pay faster

Choose Home Equity Loan if:

• You want fixed rate certainty
• You have a specific amount to consolidate
• You prefer a defined payoff date
• You're a homeowner with equity

Choose Cash-Out Refi if:

• You have very large debt ($50,000+)
• Your current mortgage rate is similar to current rates
• You're already planning to refinance
• You want lowest possible payment

Choose Personal Loan if:

• You don't own a home (or don't want to use equity)
• You have good credit (700+)
• You want fast funding without collateral
• Debt is in the $10,000-$40,000 range

Choose Balance Transfer if:

• You have excellent credit (720+)
• Debt is under $15,000
• You can pay off within promo period (12-21 months)
• You won't use old cards

Choose Debt Management Plan if:

• Credit is fair or poor
• You need structured support
• You're okay closing card accounts
• Traditional lending options denied

Red Flags to Avoid

Debt settlement companies Promise to settle debt for pennies on dollar. Reality: destroyed credit, tax bills on forgiven debt, sometimes scams. Avoid.

Payday loans or cash advances Trading bad debt for worse debt. Never.

Extending terms so long you pay more A 30-year HELOC might have lower payments, but calculate total interest. Sometimes shorter term at higher payment saves tens of thousands.

Consolidating without behavior change This is the big one. If you consolidate $30,000 and then charge cards back up, you'll have $30,000 on the HELOC AND $30,000 on cards. Worse than before.

The Smart Consolidation Process

1. List all debts (balance, rate, payment)
2. Check your credit score (determines options)
3. Calculate your equity (if homeowner)
4. Get quotes from multiple sources
5. Compare TOTAL cost (not just monthly payment)
6. Choose option that maximizes savings without excessive risk
7. Set up automatic payments
8. Cut up or freeze credit cards
9. Track progress monthly

The Bottom Line

Debt consolidation isn't one-size-fits-all. The best option depends on:

• Whether you own a home
• Your credit score
• How much you owe
• Your discipline level
• Whether you need structure/support

For homeowners with equity, HELOC typically offers the best combination of low rates, flexibility, and large available amounts. The rates are half (or less) what credit cards charge.

But any consolidation only works if you stop adding new debt. Otherwise, you're just rearranging deck chairs.

Ready to see what your home equity could do for your debt? Check your options →