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Should you consolidate on your own or take out a loan?

Dan Steadman

Financial Advisor, MoneyBeagle

Should you consolidate on your own or take out a loan?

This can be a difficult question to answer, but in any case, it really depends on your specific financial situation – how much you owe in total, what your interest rates are, and your ability to reduce your expenses to allow extra money for paying down your debt. If you are not sure about taking out a loan to eliminate your credit card debt, you may want to keep reading for more information so you can make an informed decision that is best for you and your family.

Here is one aspect to consider when comparing options to reduce your debt: if you can barely make the minimum monthly payments now, you may have a difficult time repaying the debt, even if you consolidate the debt on your own. It is important to remain current with your monthly payments to avoid additional fees and charges or an increased interest rate.

Paying Down Debt on Your Own

Paying off your debt on your own, with no assistance, is extremely challenging.  That is not to say that it cannot be done, though. If you can reduce your living expenses to allow an extra $100 to $200 dollars a month to go toward paying down your debt, then you may want to consider trying it on your own.  It takes willpower, cutting out extra expenses, and sticking to a budget.  Some people may pick up a second job and use the additional income to pay down their debt.

It is possible to eliminate your debt on your own, but you must be patient – it won’t happen overnight. You may also consider contacting your creditors to see if they will allow you to negotiate a lower payoff amount, similar to what a debt settlement company would do on your behalf. It’s worth a shot, and the worst they can do is say no.

Using a Loan to Eliminate Your Credit Card Debt

If you have a decent credit score, you may be able to take out a personal loan and use it to pay off or pay down your credit cards.  Ideally, you will pay them off in their entirety so you don’t have any additional monthly debt payments other than your personal loan. If you decide to pursue a personal loan, it is important to get a lower interest rate than the rates you are currently paying. Otherwise, you won’t be saving yourself any money in the long run.

The lower the interest rate, the lower the monthly payment, which will make it easier to make the payments on time and pay the loan off by the due date. Before you sign for a loan, be sure to understand the monthly payment amount and the loan term. If the loan term is extremely long, you may not be saving money, because you will be paying interest for a longer period of time. It is essential to make your loan payments on time to avoid incurring additional fees and charges, which will make it more difficult to make the payments.

If you don’t have a great credit score, it can be difficult to get a personal loan with a reasonable interest rate. You should also consider that your credit score should increase once you use the loan to pay off the balances. As long as you make the loan payments on time, this could be a great option to reducing your debt while increasing your credit score.

Debt Consolidation Loans

How is a debt consolidation loan different than a personal loan? It is not much different, although most debt consolidation lenders will consider applicants with low credit scores, whereas traditional lenders may not be so accommodating.  Beware, though, of the interest rates and fees associated with debt consolidation loans, and be sure to use a reputable company. A personal loan is typically obtained through your financial institution, whether it be a bank or a credit union. If you are considering any type of loan, you should begin there.

If you are unable to get approved for a personal or traditional loan, then you may want to consider a debt consolidation loan.  The type of loan depends on the company you use and/or the plan you select. Some companies will pay your creditors for you, while others may give you the money in a lump sum to pay down the debt yourself.  Either way, you are responsible for making sure your creditors get paid.

The Use of Credit Cards

The goal of any debt consolidation is to eliminate your debt and to live within your means so you don’t have to use credit cards to make ends meet in between paydays. If you get a personal loan and you pay off your accounts yourself, you may want to keep your credit card accounts open.  Keeping the accounts open may help raise your credit score, because you will have open lines of credit. Closing the accounts will reduce your overall credit, which will negatively affect your credit score.

If you decide to keep some or all of the accounts open, it is essential to use them responsibly and if at all possible, do not use them at all! Although it can be tempting, it is important to avoid using any credit cards at all costs, particularly while you are repaying a loan. You need to determine a plan for living without credit cards.  This may include a budget, cutting expenses, or even getting a second job to increase your income.

Whether you continue to keep your credit card accounts open may depend on your willpower and how easily it will be for you to avoid using them. You may also want to consider closing most of your accounts but keeping just 1 or 2 open to help maintain your credit score and to have as a backup if you have a financial emergency. Ultimately, you want to develop a savings plan so you can rely on that during an emergency, but it is always important to have a backup you can depend on.

Is a Balance Transfer a Good Option to Consolidate My Debt?

Some credit card companies offer a low interest rate if you transfer all your other account balances into this one credit card. Many companies will offer 0% interest on all balance transfers, but as with many deals that sound too good to be true, there are other details to consider.

You have to read the fine print in the balance transfer details in order to fully understand what you will be agreeing to. First, you will be charged a transfer fee on the total of your transferred amount.  The fee is usually between 2 and 5%, and this will be added to your credit card account balance, which will increase the amount you owe and your monthly minimum payment amount.

The “0%” interest rate will typically expire anywhere between 3 months to a year. During this time, you will not accumulate any interest on the account balance, but you will still be responsible for making the monthly payments. The only way to really use a balance transfer to your advantage is if you can make a significant reduction in the total balance during the introductory interest rate period.

Just making the minimum monthly payment on a balance transfer will not really benefit your financial situation, although paying off the other accounts does help.  After the introductory period, the interest rate will increase significantly, which will increase your monthly payment. If you decide that a balance transfer is right for you, be sure to read the fine print and understand all aspects of the fees and charges, in addition to the monthly payment amount.

How to Reduce Your Debt Without a Loan

It is not easy to pay off your debt without any assistance, but it can be done.  It will take sacrifice and dedication, but it will be well worth it once you get out from a cloud of debt and have financial freedom. While you have to find the option that works best for you and your situation, there are proven ways to reduce your debt without a loan.

Depending on how long you have owned your house, you may want to consider downsizing until you have repaid your debts. Some consumers move into smaller houses, while other find apartments as a temporary solution to reduce their expenses.  The key is to use the extra money to pay down your debt.

Creating a budget sounds easy, and it can be.  The challenging part is sticking to it.  Making small changes can have a huge effect on the amount you can put toward debt instead of toward other things. For example, drink more water. You already pay a water bill, so you may as well utilize that water to reduce your expenses.  Don’t buy bottled water, and only order water when you go out to a restaurant (it’s free!). It may sound silly, but this can make a small difference in your budget, and when combined with other small changes, can add up over time.

You may also want to reduce your food budget.  How often do you eat out or buy coffee or lunch? If you make your own coffee and pack a lunch instead of going out to eat, you can save a significant amount of money each month. Make a list of your expenses and go through it line by line to see where you can make cuts.  Many people pay over $120 per month for cable – just think about how much that adds up to in the course of a year! If you eliminate that bill alone and put it toward your debt, that’s an additional $1,440 in debt reduction.

There are many online resources that offer budget plans, tips and advice to reduce your debt without getting a loan.  If nothing else, give this a try before you pursue a loan.  You may surprise yourself, and you will be saving money if you can do it on your own without a loan and its associated fees and interest rates. Think about how great that will feel to gain your own financial freedom without costing yourself any money!

Consider All Your Options

Of course, everyone has their own unique situation, so it is important to research all options available in order to find the best one for you. If you are near your credit limit and have past due accounts, it may be too late to fix the problem on your own.  Again, it really all depends on your specific situation.  Before you pursue a loan, develop your own budget and a list of all your expenses. Use this to determine the monthly payment you can afford and where you can make cuts to your expenses.

If you are worried about your credit score, don’t worry too much. Credit scores can easily be increased if you begin on a path to repaying your debts. Eliminating any delinquent or past-due accounts will also help your credit score in the long run. Depending on the option you choose, your credit score may dip a little at first but it will recover as you pay off your debts. If you decide to pursue a debt consolidation loan or any other option, be sure to understand the details completely and how the plan or loan will affect your credit score.

Different companies and organizations have different plans and options for repaying your creditors. Some may negotiate on your behalf, while others may ask that you close all the accounts before using a loan. These variations can affect your credit score in different ways, so be sure to understand any agreement before you sign it.

So, is it better to consolidate our credit card debt on your own or take out a loan? The answer is really up to you. After reading this, hopefully you have a better idea of the best option for you.


Dan Steadman

Dan Steadman

Financial Advisor, MoneyBeagle

Dan is one of the top financial experts when it comes to debt consolidation. With more than 20 years of experience helping people tackle debt, he has a unique insight when it comes to solving debt-related problems. 

Dan got his start when he went to work for a bank after getting his Business Degree. He worked his way up and became a loan officer. This position gave him unique insights into the ways that financial products work and how people can utilize different financial products to improve their lives. He’s seen hundreds of success stories and just as many failures – so he knows what steps are most likely to help his readers.

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