Smart money moves: How and when to get a debt consolidation loan under $5,000

An intentional approach to money management is what separates those who stay stuck from those who build the life they want. Once you make the conscious decision to start moving beyond your debt, it’s easier to start building the life you want. 

It doesn’t matter how little or how much you owe. What matters is choosing a strategy to get to a place where your money works for you. 

Debt consolidation is a strategy to consider. Here’s how it works.

Personal loans for debt consolidation

A personal loan for debt consolidation could help you move debt from credit cards to an installment loan. Personal loans often have lower interest rates than credit cards, and that means a few things. 

First, a bigger percentage of your monthly payment will go toward paying down the debt, and not toward paying interest. That helps you pay down your debt faster, since more of your money is doing what you want. 

Second, you may get a friendlier monthly payment, depending on the loan terms you choose. That can make it easier to fit into your monthly budget, too.

Personal loan lenders may charge a fee for making the loan. This is called an origination fee or a lender fee, and the range is typically 2%-10% of your loan amount.

Many lenders allow you to view your rates and terms without any impact on your credit. You can get a better idea of how much the debt consolidation loan might cost compared to your other options. 

Lenders set their own minimum and maximum loan amounts. You may have fewer lenders to choose from if you’re hoping to get a debt consolidation loan under $5,000. Many lenders set the minimum at $5,000, but some offer larger or smaller loans, too. 

Home equity loans for debt consolidation

If you’re a homeowner, you could apply for a home equity loan for debt consolidation. 

To qualify, you’ll need to have enough equity in your home to borrow against. Home equity is your home’s value minus your mortgage balance. 

The minimum loan amount for a home equity loan is usually higher than $5,000. A home equity loan could make sense if you have another large expense to cover, like fixing up your home, in addition to the debt you want to consolidate.

Home equity loan lenders also charge origination fees. The fee you pay is based on many factors, including the loan size, your credit score, and the repayment term you choose. 

Home equity loan interest rates tend to be lower than personal loan interest rates. That’s because a home equity loan is a secured debt. It’s a mortgage, which means your home guarantees the loan. If you don’t repay the loan, you could lose your home.  

That extra layer of guarantee means a cheaper loan, compared to other options.

Balance transfer cards for debt consolidation

Some people also choose to use a strategy to consolidate their debt, using a balance transfer credit card. You move your balances from existing credit cards to a new card to get a period of time at zero interest or very low interest. 

This intro period could last for six to 21 months after you open the credit card, depending on the offer. It’s possible to make very fast progress against your debt during that time, since more of your money goes toward paying down your balance and not toward interest charges.

Most balance transfer cards charge a transfer fee ranging from 3% to 5% of each transfer. Some also charge other fees, too.

The real advantage of a balance transfer credit card is the interest-free or low-interest intro period. After that ends, any balance you still owe will be subject to the normal interest rate on the card, which could be quite high.

A big risk of the balance transfer strategy is that it can turn into a juggling act. Here’s what could happen:

• Each time you don’t pay off the balance by the end of the promotional period, you look for another balance transfer offer. 

• You might continue using the credit card while you’re trying to pay it off, and that slows your progress. 

• You could charge up new balances on the cards you just zeroed out with balance transfers and end up in even more debt than before. 

These are real risks to consider before you decide whether new credit cards and balance transfers are the right strategy for you.

Other options for debt help

Debt consolidation loans aren’t the right answer for every situation. Here are other options that might work better for you. 

• Bankruptcy. Bankruptcy is a legal process for dealing with debt. Some people qualify to have certain debts erased. Or you might get a structured repayment plan supervised by the court. 

• Debt resolution. You or a professional debt resolution company can negotiate with each of your creditors to reduce your debt.

• Debt hardship programs. You can ask your creditors directly for help, such as a payment pause or a lower interest rate.  

• Credit counseling. Professional credit counselors can help you assess your debt options for free. They might recommend a debt management plan, which is a structured plan to fully repay your unsecured debts. 

• DIY debt payoff plans. If you can afford extra debt payments, tackling each debt separately using the debt snowball or debt avalanche method could help you pay them all off quicker so you can get rid of debt for good.