Top Debt Consolidation Options: Pros & Cons

Debt Consolidation numbers on kraft paper

Debt consolidation refers to the process of combining multiple loans into one. The objective is to simplify payments, negotiate better terms, and, ideally, reduce the interest rate.

Here is information about a few common tools and products that can be used for debt consolidation. Each has different benefits and drawbacks. Which option is right for you often depends on your particular financial circumstance.

Debt Consolidation Loans

A debt consolidation loan is a single loan that replaces multiple others. The goal is to lower your monthly payments and reduce the overall interest you pay.

Debt Consolidation Loan Pros:

It simplifies the debt repayment process, reducing it to a single monthly payment. Also, the interest rates are typically lower than those of your existing debts, especially high-interest credit card debt, which is often 20% and higher.

Debt Consolidation Loan Cons:

Whether you qualify for a loan that will reduce your overall monthly payments as well as your interest rate depends on your credit score and your debt-to-income ratio. Qualifying for these loans often requires good to excellent credit. If your credit score isn't high, you may face higher interest rates or be denied altogether. Also, these loans don't address the behaviors that led to debt accumulation, leading to a risk of falling into debt again.

Home Equity Loans or Lines of Credit (HELOC)

With a home equity loan or a home equity line of credit, homeowners can borrow against the equity in their homes — the portion of the home they own or that is not mortgaged — in order to consolidate their debts.

Home Equity Loan Pros:

Interest rates for these loans are generally lower, and you could potentially borrow a large sum depending on your home equity. The interest paid may also be tax-deductible.

Home Equity Loan Cons:

There's a risk of losing your home if you fail to make repayments since your home serves as collateral. Additionally, there may be upfront fees and costs associated with these loans.

Debt Settlement or Debt Resolution Programs

Debt settlement programs can also be a viable option for certain individuals, although they're a bit different from the traditional methods of debt consolidation.

A debt settlement program, also known as debt relief or debt resolution, is a service that negotiates with your creditors to reduce the amount you owe, making it easier for you to clear your debts. This strategy is usually suitable for unsecured debts like credit card debt and certain types of student loans or medical debt.

Debt Settlement Pros:

The primary advantage of debt settlement is the potential reduction in the total debt owed. Typical savings reported are 40% – 50% off of the original debt balance. This makes it an attractive option for individuals who are overwhelmed by large amounts of unsecured debt. And debt settlement programs are a solid option if you are struggling to make your monthly payment, as the programs can be adjusted to accommodate what you can reasonably afford to pay each month.

Debt Settlement Cons:

These programs often require you to stop making payments on your debts and instead put money into a separate account for the debt settlement company to use in their negotiations. Stopping payments to your creditors could lead to additional fees and penalties, and will negatively impact your credit score. However, if you are struggling with a large amount of debt, your credit score is likely already negatively impacted. (The surest way to repair your credit score is to pay off your debts, using any method.)

Additionally, there's no guarantee that the debt settlement company will be successful in their negotiations. You might also end up paying taxes on any amount of debt that is forgiven by your creditor, since the IRS often considers forgiven debt to be taxable income. And debt settlement can be a lengthy process, often lasting two to four years. It is essential to research and consider the reputation of the company before committing to a debt settlement program.

Balance Transfer Credit Cards

Balance-transfer offers for credit cards often come with a low or 0% introductory interest rate for a specific period, making them suitable for consolidating high-interest credit card debt.

Balance Transfer Pros:

You can save on interest payments during the introductory period.

Balance Transfer Cons:

Once the promotional period ends, the interest rate often skyrockets — and will sometimes surpass the interest rate you were paying before you transferred your balance. A good rule of thumb: if you cannot confidently pay off the outstanding balance before the end of the promotional term, do not transfer your balance. Also, these cards usually charge a balance transfer fee, ranging from 3% – 5% of the total balance you transfer.

Debt Management Plans (DMPs)

DMPs are a program offered by credit counseling agencies. They assess your debt, create a payment plan, and then negotiate with your creditors to reduce your interest rates or waive certain fees given the guarantee of your regular payments.

DMP Pros:

These plans can provide a structured repayment plan and offer the possibility of lower interest rates.

DMP Cons:

The plans typically require you to close all your credit accounts, which could hurt your credit score. And some of your creditors may not agree to negotiate, making it impossible to include all your debts. Although DMPs are often offered by non-profit organizations, this does not mean that the program itself is always free. Fees will vary; be sure you inquire.

401(k) Loans

These are loans in which you borrow against any retirement savings you have, rather than access the funds and pay large penalties.

401(k) Loans Pros:

They don't require a credit check, and the interest rate may be lower than other options.

401(k) Loans Cons:

You're essentially borrowing from your future self, and it could impact your long-term retirement savings. Additionally, if you leave or lose your job with the company who sponsors the 401(k) plan, you may need to repay the loan sooner than expected, which could put you under financial strain.

Peer-to-Peer (P2P) Loans

P2P loans are funded by individual investors rather than banks.

P2P Loans Pros:

It's often easier to get approved for P2P loans than traditional bank loans.

P2P Loans Cons:

The interest rates can be high, especially if your credit score isn't stellar. Also, these loans often come with origination fees.

In conclusion, the best method for consolidating debt depends on your financial situation, your credit score, and your personal discipline in managing debts. All these options have potential benefits, but they also come with risks. It's important to understand these trade-offs before deciding which tool to use. Remember, debt consolidation is a tool to manage debt, but it doesn't eliminate the debt. It's crucial to address the root cause of the debt issue and maintain good financial habits to prevent recurring debt problems.


At Patriot Funding, we believe you are more than your credit score — and we are ready to work with you to free you from high-interest credit card debt.

Stop juggling competing bills and end the cycle of paying minimums that gets you nowhere. Instead, consolidate your debts and pay one single bill monthly, at a lower interest rate.