According to the Federal Reserve, reported consumer debt increased by billions in April 2020. So, if you’re struggling with debt, you’re definitely not alone. If you’re looking for a way to dig yourself out of debt, a debt consolidation loan could help.

But what is a debt consolidation loan? Find out if it’s the right option for you—and learn about some alternatives.

What Is a Debt Consolidation Loan?

A debt consolidation loan is exactly what it sounds like. It’s a loan that consolidates, or combines, your debts under a single account. Some potential benefits of debt consolidation include:

• Potentially lower interest rates, especially if you now have the credit score to consolidate high-interest loans under better terms.
• A single payment, making it easier to manage your finances.
• Your debt possibly spreading out over a greater amount of time, making each monthly payment more affordable.

How Can I Get a Debt Consolidation Loan?

Your options depend on your credit, existing assets and how much debt you want to consolidate. Learn more about a few common debt consolidation loan options below.

1. Refinance Your Mortgage If You Have Equity

If you have equity in your home, you can refinance it or take out a home equity line of credit (HELOC). These options give you cash you can use to pay down debt.

Pros:

• Home equity loans and HELOCs tend to have much lower interest rates than personal loans and credit cards.
• You may be able to deduct interest on home loans to reduce tax burdens.
• The total number of payments you need to manage each month are substantially reduced, and you’re less likely to forget to pay your mortgage.

Cons:

• You use your home as collateral for the debt, which means if you don’t pay it, the lender has a claim on your house.
• Variable-rate loans, which might be an option, could come with increased interest in the future.

Tip: Don’t pocket the money that refinancing frees up every month. Instead, use it to create an emergency fund. Once that’s set up, use the money as prepayment against your home loan or to boost retirement savings.

2. Use a Balance Transfer Card

Apply for a balance transfer card if your credit is in good shape or call a card provider to ask if they would be interested in offering you a balance transfer option on an existing card. Balance transfers work when you can transfer higher-interest credit card debt to a card with lower interest rates. Some balance transfer cards offer 0% APR for a year or two on new balance transfers for new account holders.

Pros:

• Can substantially reduce the cost of credit card debt.
• Makes it easier to pay credit card debt off
• Might let you consolidate multiple cards into a single account for easier management.

Cons:

• Balance transfers usually come with fees of 3% to 5%—still less than your typical interest costs might be on high-interest credit card debt.
• It can be tempting to use your old credit cards again, running up more debt and ending up with double the debt you started with.

Tip: Keep your old credit card accounts open for extra benefits to your credit score. It helps your credit utilization rates and credit age. But if you use those accounts, you could end up back in debt again.

3. Borrow From Retirement Savings

If you have retirement savings, you might be able to borrow from it to pay off debt. Remember, though, that you’ll need that money later. Only consider this option if you can pay back the money quickly, so you don’t lose time building your retirement funds.

Pros:

• Doesn’t require a credit check, so you don’t need a thick credit file.
• Interest rates are low, and you’re actually paying it back to your own account.

Cons:

• You might owe taxes and penalties on the money if you withdraw early from your retirement.
• You can borrow against some employer-sponsored retirement plans, but debt consolidation might not be an allowed reason.
• You could reduce how much money you have in retirement, especially if you can’t pay back the money.

Tip: Consider this option as a last resort loan or if you have some money coming in soon, such as from a tax return. If you can pay the money back within a month or two, you don’t have as much to lose.

4. Ask a Friend or Relative for a Loan

If you know someone who has some extra money, it might be worth asking them for a loan at a low interest rate. You can use the money to pay off your debts and then make one monthly payment to the person in question.

Pros:

• No credit check or requirements.
• Your family member or friend can earn some interest.

Cons:

• If you blow it, you might ruin an important relationship.
• The IRS can be a real pain when it comes to family loans, so consult a tax professional.
• Loan payments won’t be reported to your credit reports or potentially help your score.

Tip: Treat the transaction as you would with a bank or other lender. Put everything in writing, agree to fees or penalties if you miss payments and strive to make timely payments.

5. Take Out a Personal Loan

Personal loans are not the same as loans from friends or family members. Personal loans aren’t from people you know. They’re loans that often don’t require security or collateral. Typically, they’re short term—which means you pay them back within a few months or a few years.

But if your credit is decent, you might be able to score a personal loan with better rates and terms than your current debt. That’s especially true if you’re dealing with credit card debt.

Pros:

• Potentially better interest rates.
• A single payment to manage.
• Ability to spread payments over a longer time period to reduce how much you need to pay each month.

Cons:

• Typically requires a credit check.
• If you’re consolidating credit card debt, it could leave your credit card balances free to run up again.

Tip: Ensure you’re in a financial situation that allows you to pay down the new debt without running up more debt. You don’t gain anything if you take out a personal loan to pay off high-interest credit card debt, only to create more credit card debt at the same time.

Additional Options

If you don’t have enough income to pay your debts at all, consider whether a debt consolidation loan is right for you. Other options can include:

• Debt counseling to help you create a viable personal budget and negotiate with creditors for better terms.
• Talking to your creditors to find out if they have assistance programs, especially if you’ve lost your job or are experiencing an emergency.
• Bankruptcy, which is a last-resort option that can help you restructure your debts and make a new start in a few years.

Is It a Good Idea to Get a Debt Consolidation Loan?

A debt consolidation loan is a way to reduce high-interest costs or create a more manageable debt payment option. It canreduce the amount you owe each month to make debt more affordable, but it doesn’t make debt go away. Debt consolidation could be a good option if you’re dealing with debt collectors and want to convert old debt to something new that isn’t past due or in collections.