If you're having trouble keeping up with multiple payment deadlines each month or can't get ahead of high interest rates, turning to a reputable debt consolidation company might make sense for you.
What Is Debt Consolidation — and How Can it Help You Pay Balances Quickly?
Debt consolidation involves combining multiple debts into an individual debt you manage with a single creditor. There are many potential advantages to consolidating your debt:
You can save money on interest when you qualify for a lower interest rate.
You can more easily keep track of your debts by combining multiple monthly payments into one.
You can improve your credit in the long run.
Sometimes, debt consolidation can help you pay your debts off faster. When you have lots of loans and credit cards with different repayment timelines, interest rates, and monthly payments, keeping track of your debts and paying them off is challenging.
But when you combine them into a single debt and focus on paying that debt off within a specific timeline, paying your debt down faster may seem more manageable.
In addition, you might find it easier to pay off your debt quickly when your consolidated debt has a lower interest rate than you were previously paying. That's because more of your monthly payment will go toward your debt's principal, not interest payments.
You can even put some of the extra money you save in interest toward your monthly payment, reducing the time it takes to pay off your debt.
Keep in mind that debt consolidation won't automatically make you pay your debts off faster. The time it takes to repay depends on the timeline of your existing debts and the repayment terms for any debt consolidation option you choose.
Expert Tip
If your goal is a fast debt payoff, compare your existing debts across several debt consolidation strategies — and remember, one of the best ways to pay off debt fast is to make more than the minimum payment of your outstanding balances each month.
Getting Out of Debt Fast: 6 Consolidation Strategies
You can choose from several consolidation strategies to get out of debt faster:
1. Debt Consolidation Loans
“Debt consolidation loans can combine all your debts into one payment with hopefully a lower interest rate,” says Ashley Morgan, debt and bankruptcy attorney at Ashley F. Morgan Law, PC.
“This can structure your debt payoff into one payment … [and] can be a decent option for someone who wants to simplify their debt process.”
Debt consolidation loans let you combine many debts into a single loan from one lender with a fixed interest rate and monthly payments. You borrow the loan in one lump sum and use it to repay all your creditors (or the lender pays them directly). Then, you pay the lender back with a single monthly payment for the loan term (usually one to five years).
The goal is to combine multiple loans into a single loan with one monthly payment and, hopefully, a lower interest rate, which could help you pay off debt faster.
Remember, lenders reserve the best interest rates for borrowers with good or excellent credit scores. Plus, debt consolidation loans may extend the time you're paying off debt if you choose a longer repayment term.
However, you can typically make payments above the minimum to shorten the repayment period. (In some instances, the lender may charge a prepayment penalty)
2. Balance Transfer Credit Cards
Balance transfer credit cards allow you to move current balances to a new card with a special introductory low interest rate. Borrowers with good or excellent credit can qualify for rates as low as 0%.
The promotional interest rate lasts for a predetermined amount of time, and once it expires, the regular interest rate applies to any remaining balance. You should aim to pay off the entire balance before that happens to save money on interest.
The length of the promotional period depends on the card, but it could last from six months to well over a year.
Balance transfers are easy to set up and can dramatically reduce the interest you're paying — which can shrink your monthly payments and allow you to focus on paying down the principal, allowing for faster debt payoff.
On the downside, you may have to pay a balance transfer fee, often 3% to 5% of the transfer amount. A few cards offer free balance transfers.
If you can't pay off the balance in full, you'll get stuck paying higher interest rates. And if you use the card to make purchases, you won't see as much value out of the card.
3. Home Equity Loan or Home Equity Line of Credit (HELOC)
Homeowners can use their home equity – the difference between their home’s value and the amount they owe on the mortgage – to take out a home equity loan or a home equity line of credit (HELOC).
Home equity loans act like traditional loans, but you are borrowing using your home equity as collateral. You get a lump sum that you can use to pay off your debt, then repay the loan with fixed monthly payments at a fixed interest rate.
HELOCs give you a line of credit, with a variable interest rate and fluctuating monthly payments, to draw from using your home equity as collateral. You can draw from this line of credit to pay your debts, then pay it back over time with a single monthly payment.
This option is best suited for homeowners with significant home equity who can qualify for lower interest rates than they're paying on their current debts. Luckily, home equity loans and HELOCs often feature low interest rates because they're secured.
However, borrowing against your home equity comes with some risks. If you’re already struggling to make your debt payments, tying another loan to your home equity could put you at risk of foreclosure. Plus, if your home value suddenly drops, you could owe more than your home is worth.
Home equity loans and HELOCs also won’t necessarily get you out of debt quickly unless you start making more aggressive payments using the money you’re saving with a lower interest rate.
4. Debt Settlement Companies
When you’re having trouble paying your debts, debt settlement companies can work with you to negotiate lower payoff amounts with your creditors. Once you accept a settlement and enroll in a program, you make a single payment to the debt settlement company, which then manages your payments to your creditors.
This option's most significant advantage is (potentially) reducing the amount you owe, which could help you pay off your debts faster. Many debt settlement companies claim their customers pay off their debts within 24 to 48 months. Plus, if you enroll multiple debts into the program, you can simplify several monthly payments into one.
However, there are significant downsides to debt settlement. For one, the debt settlement company may tell you to stop making payments while they negotiate with your creditors, which can have major negative consequences for your credit.
Debt settlement fees often range as high as 25% of the debts enrolled in the program. You have no guarantee that the company will succeed when you stop paying your creditors. And you'll only eliminate debt faster if you can work out a faster repayment schedule.
5. Debt Management Plan
Credit counseling agencies are non-profit organizations that help debtors work with their creditors. They can help you set up a structured debt management plan (DMP) to get assistance with your debts.
The agency can negotiate with your creditors to set up better payment terms, lower interest rates, and put you on a debt repayment plan that typically lasts three to five years, though you may have the option to pay off your DMP early if you can.
Once set up, a DMP operates similarly to a debt settlement program. You pay the credit counseling agency, which forwards the funds to your creditors. Unlike debt settlement companies, DMPs can cost nothing or may require a setup fee and ongoing monthly fees to maintain.
You will likely be required to close any credit card accounts included in your DMP, which can temporarily damage your credit score, and you can't typically open new loans or credit cards when you're on a DMP.
6. Tap Your 401(k)
Borrowers with an employer-sponsored 401(k) retirement account may want to tap their retirement savings in order to consolidate their debt. When you have a 401(k), you can borrow from it to pay off existing debts, then pay back what you borrowed over a repayment term of up to five years (if your plan administrator allows it).
Interest rates for 401(k) loans are typically low, and the interest you pay on the loan goes back into your retirement account. There is no credit check, so you don’t need to worry about your application getting denied on the basis of poor credit.
"Borrowing from a 401(k) usually results in a low-interest loan, and the interest is paid back to yourself," says Morgan. "Now, you are borrowing against your future, so you are limiting the earnings you could get on those funds, but that is often a small price to pay compared to dealing with high credit card debt and/or debt collection."
There are some significant disadvantages to this approach. For one, you're reducing the balance of your 401(k) and limiting your potential future earnings through compound interest. If you fail to repay the loan according to its terms, the unpaid amount is considered a plan distribution and subject to taxes and early withdrawal penalties. And if you leave your job, you could even be required to repay the loan in full all at once.
Another option is to take early withdrawals from your 401(k) to pay off your debts and wipe them away all at once. But if you're under 59 and a half, your withdrawals will be subject to income tax and an additional 10% early withdrawal penalty.
Frequently Asked Questions
What Is the Quickest Method to Get Out of Debt?
The quickest way to get out of debt depends on how much you have, what kinds of debts you have, what interest rate you're paying, and other factors. Generally, the best way to pay off debt faster is to put extra money toward your debts each month to reduce the time it takes.
What Is the Best Method for Debt Consolidation?
The best consolidation method depends on your creditworthiness, the interest rates you can access, and the types of debt consolidation available to you. Two of the best options include debt consolidation loans and balance transfer credit cards, which help you combine multiple high-interest debts into a single debt with a lower interest rate.
Is Debt Consolidation the Best Way to Get Out of Debt?
For many borrowers, debt consolidation is the best way to get out of debt. Debt consolidation may be a prime option for you if:
You have trouble keeping track of your monthly payments.
You can get a better interest rate using debt consolidation.
You need a different repayment timeline.
