DIY Debt Consolidation: How to Consolidate Debt Yourself

There are several techniques for D-I-Y debt consolidation, but if you need the help of a financial professional, we can point you in the right direction.

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You don’t have to be drowning in debt to know what it describes: someone floundering in the deep end of the financial pool who’s about to go under if he/she doesn’t latch onto a life preserver.

That life preserver could be a credit counselor, perhaps, or a debt-management company … or it could be the person in the mirror starting back at you!

Did you ever consider saving yourself through do-it-yourself (DIY) debt consolidation?

American consumers reduced their credit card debt by $128 billion in 2020. However, the average American household still has an eye-popping $7,938 in credit card debt. Consumers with only fair credit (between 580 and 669) can expect to be charged a stout 23.4% interest.

The DIY method isn’t for everyone. It requires uncommon discipline, but if you have the wherewithal to create a legitimate plan, sell your creditors on the plan’s merits, and stick to the schedule of required payments, it can be done.

How to Prepare for DIY Debt Consolidation

Do-It-Yourself Label

Again, DIY debt consolidation is not for everyone. Consumers need reasonably good credit, a fair amount of free cash flow in their budgets, and — believe it or not — the right amount of debt.

Even then, the plan doesn’t work for those who see paid-off credit cards as an invitation to binge-spend again. Instead, a successful debt-consolidation plan involves almost obsessive commitment to repayment.

Time to plot your course.

  • Create a list of the debts you intend to consolidate. It’s probably best if it is only credit card bills, but it might include medical bills and personal loans.
  • For each creditor, note the lender’s name, total amount owed, interest rate, and minimum monthly payment.
  • Get a copy of your credit report from one of the big three credit-monitoring agencies (Experian, TransUnion, Equifax). Each owes you one free report every 12 months.
  • Know your monthly income. (Can you increase it with side hustles?)
  • Revisit (or establish) a budget that doesn’t include the debt you plan to consolidate. Stick by it.
  • Identify expenses you can cut out or at least trim (streaming services, entertainment, dining out, recurring donations).
  • Establish how much free cash flow you have after you pay necessary expenses.
  • Stop charging. No, seriously. STOP CHARGING.
  • Do your homework: What debt consolidation method is best for your situation? We’ll explore the options below.

Personal Loans

Personal loans are the most straightforward way to handle debt consolidation. You ask a bank, credit union, online lender – or maybe even a relative or friend – for a big enough loan to pay off all your credit card debt.

It makes sense if the interest rate is lower than what you’re paying on your credit cards. If you have good credit, it should be considerably lower. If you have poor credit, it may not be worth the trouble.

The best thing about a personal loan is that it simplifies the process. You make one fixed payment to one lender every month. The loans typically are for 3-5 years and if you make on-time payments, your credit score should improve.

Credit Card Balance Transfer

A balance transfer in which you consolidate a handful of credit card balances to a single, zero-interest credit card is an uncomplicated way to streamline your payments and pay less in interest for an introductory period, usually 12-18 months.

However, it comes with an imposing qualifier: You must have a good credit score – 690 or better is recommended – and that poses a problem if you’re behind on payments.

Do the math. There is no point transferring balances to a single card if you don’t save money.

Debt Consolidation Loan

Lenders, including banks and credit unions, offer loans designed to replace an assortment of consumer debt with a single loan, usually at a lower interest rate. Though debt consolidation loans work for some, it’s important to understand each lender’s terms and the potential risks if you miss payments.

Banks and credit unions are a good source for unsecured loans, but they tend to be selective about who they approve. People with the best credit scores get the lowest interest rates. Credit unions tend to offer better deals than banks, so shop around.

Online lenders often approve a loan in a few days and will accept borrowers with lower credit scores than banks or credit unions. Beware: The interest rates may be higher.

The worst option, one you should probably avoid, involves storefront lenders and debt consolidation companies that add extra fees for originating loans and charge much higher interest rates. Avoid for-profit companies and always carefully review the terms.

The debt consolidation loan business has a spotty reputation and there are many scam artists. Be diligent: Avoid credit-repair scams.

Home Equity Loan or Line of Credit

Home equity loans and their variant, home equity lines of credit (HELOCs) — formerly known as second mortgages — allow you to borrow against home equity (the difference between how much your home is worth and how much you owe) usually at rates far lower than you’re paying on credit card debt.

The downside — your house secures the loan and you could lose it — is why you get a lower rate. If you are comfortable with that, equity loans allow you to make regular, predictable payments. If you have sufficient equity in your home and you meet other income and credit standards, you can take a loan or get a credit line that will allow you to transfer all your credit card debt to a home loan you can repay in regular installments.

Financial advisers often warn clients not to convert the unsecured debt on credit cards to a secured debt on your home for that reason: Your home is among the possessions you can protect from creditors even in bankruptcy.

The same holds true for another home loan option, cash-out refinancing. In this case, you refinance your primary mortgage, turning it into a larger loan with, hopefully, a lower interest payment. You use the cash you take out of the refinancing to pay off your credit card debts. (Lenders sometimes make paying off listed debts at closing — you never see the cash — as part of approving the loan.)

Again, turning unsecured debt into secured debt, is a risky maneuver.

Ask Friends or Family for Help

We don’t know the nature of your relationships, but know that the moment borrowing from a friend or family member pops into your head: Things will change.

Make certain you can afford, and will deliver on, the repayments. Discuss, upfront, what happens if you can’t live up to your side of the bargain. You may conclude the risk to your relationship is too steep a price.

On the upside, you probably won’t have to meet minimum eligibility rates, and you may end up with a very favorable interest rate.

Borrow from Retirement

Borrowing from an employer-sponsored retirement plan such as a 401(k) loan gives you access to money that can be used to pay debts. Before considering this alternative, understand restrictions that apply to retirement-account borrowing.

  • You have five years to fully replay a 401(k) loan or face early-withdrawal and tax penalties.
  • If you leave your job for any reason, you have to repay the loan balance within 60 days or pay early-withdrawal penalties.
  • You can’t borrow more than 50% of the vested value of your 401(k), and your loan can’t exceed $50,000.

Remember: This is your retirement money. If you fail to repay it, you will lose the money. Even if you do repay the loan, you will lose whatever growth the amount you borrowed might have accrued.

In short, don’t get the idea that borrowing from your retirement account is a terrific idea. It’s not.

Cash-Out Auto Refinancing

Cash-out auto refinancing works similarly to a cash-out mortgage refinancing: You refinance your car/truck/SUV — assuming you’re not upside down on the loan — and use the cash to consolidate debt.

Again, shop hard. Different lenders may appraise your vehicle differently, affecting your available equity, and you’re likely to encounter a range of interest rates and fees.

Also again, if your vehicle becomes collateral in your debt-consolidation plan and you can’t keep up with the payments, you’re putting your reliable transportation at risk.

Whatever you do, do not confuse cash-out auto refinancing with car title (or “pink-slip”) loans — short-term loans at notoriously high interest rates in which the lender can take your car if you default. Avoid car title loans at any cost.

DIY Debt Consolidation Mistakes to Avoid

OK, you know what you want to do. Let’s explore what not to do. These are the mistakes others have made — including one of legendary proportions.

  • Failure to choose wisely: Make certain your consolidation loan packs a lower interest rate than your current debts. A lower overall monthly payment achieved simply by stretching out the repayment period is no bargain if you’re saddled with an unfavorable interest rate.
  • Failure to ask for help or debt consolidation advice: Consult a nonprofit credit counseling professional and, if you’re a member, talk with a personal finance specialist at your credit union.
  • Failure to research your options: With good advice, you’ll know a variety of debt-consolidation strategies are available. Secured or unsecured loans. Low-interest personal loans. Zero-interest balance transfer cards. Debt management. Debt settlement. Do your homework.
  • Failure to shop around: Once you’ve identified your best option(s), find out who wants your business most. You have something — repayment of your debt — to sell. Who’s going to offer you the best terms?
  • Failure to finish what you start: Be realistic about your ability to keep pace with the terms of your consolidation agreement. Even if you suffer the occasional setback. You’ll be glad you stayed the course.
  • Failure to address the root cause: Are you choosing debt consolidation because of something beyond your control: Job loss, divorce, accident or medical emergency? Or are you hoping to get out from under the painful results of unsustainable spending? If the latter, you need more than a consolidation loan. You need to confront fundamentals of your financial choices, perhaps through professional debt counseling.
  • Failure to follow a proper repayment plan: Debt consolidation should be the first step toward getting out of debt completely. Once you have selected the best loan with the lowest interest rate, pick the shortest possible repayment tenure.
  • Failure to set up an emergency fund: Avoid slipping back into unsustainable debt: Feed a savings account to be tapped only in an emergency. Note: Fixing a leaky roof or broken-down car qualify as emergencies. A new outfit for work is not.
  • Know what form of debt relief you’re in and how it works: And then there’s this, perhaps the ultimate epic fail… Touted as a “nationally recognized financial expert,” blogger/freelancer Miranda Marquit failed to read the fine print, and got royally slammed for it. Thinking she was signing up for debt consolidation, Marquit instead turned over her finances to a debt settlement company. By the time she recognized her error, she was being sued for nonpayment and her credit score had tanked 100 points.

Work with a Nonprofit Credit Counseling Agency

Even if you’re someone who enjoys other DIY projects, you shouldn’t take the debt-consolidation plunge without good, expert advice. (No, that doesn’t mean watching a series of YouTube videos. Debt consolidation isn’t like changing a headlight.)

You can consult with a credit counselor for advice on a do-it-yourself plan or — OR! — how you would benefit by getting hands-on help from experts about working with creditors and creating a debt management plan to eliminate your debt.

About The Author

Bill Fay

Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it in 2012, helping birth into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering the high finance world of college and professional sports for major publications, including the Associated Press, New York Times and Sports Illustrated. His interest in sports has waned some, but he is as passionate as ever about not reaching for his wallet. Bill can be reached at [email protected].


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