How to choose between DIY debt payoff and debt consolidation

You’re ready to move on from your debt. That’s a great choice, and you deserve a pat on the back. Choosing the right debt strategy could make it even easier for you to make sure every bit of your effort counts. 

People like you often choose between DIY debt payoff vs. debt consolidation when they’re serious about getting rid of debt. Debt consolidation means taking out a new loan, which isn’t always intuitive at first glance, but it could offer many advantages. Or, maybe a DIY debt payoff method is better for you. 

The goal here is to find a strategy that fits. Let’s see what might work best for you. 

What’s the main difference between DIY payoff and debt consolidation?

DIY debt payoff means creating your own plan for attacking your debts, usually with extra payments instead of refinancing any of your existing debts. Debt consolidation means transferring your debt to a new loan; it works best if the loan has a lower interest rate than you're currently being charged so you pay less in interest fees.

What is DIY debt payoff?

DIY debt payoff means using a specific strategy—like the popular debt snowball or debt avalanche methods—to pay off your debts one at a time. Most methods start by making all of your minimum debt payments, then prioritizing where your extra money goes based on the strategy you choose. 

Here's how the debt snowball and debt avalanche work:

• Debt snowball: List out your debts from smallest balance to largest. Pay off the smallest debt first. Then, take your newly freed monthly payment and send it in each month to the next debt on your list, until that one is paid off. Rinse and repeat until all debts are gone.

• Debt avalanche: List out your debts from highest to lowest interest rate. Pay off the highest-rate debt first. Then, as with the debt snowball method, roll each newly freed monthly payment to the next debt on your list, until everything is paid off. 

DIY debt payoff pros

• Use for any type of debt

• No need to take on any new debt

• Full control over your debt payoff journey

• May be able to pay off debt faster

DIY debt payoff cons

• Requires organization

• Potentially multiple debt payments each month

What is debt consolidation?

Debt consolidation means applying for a new loan and using the funds to pay back your other debts. The idea is to transfer and combine multiple debts together into one single loan with a lower interest rate. A personal loan, a home equity loan, or a home equity line of credit (HELOC) could be good options to consolidate debt. 

Debt consolidation pros

• Fewer individual debts to track

• May lead to lower monthly payments

• Could help build credit with on-time repayments

Debt consolidation cons

• Need to apply for a new debt

• New loan may come with origination fees or other extra charges

• Difficult to get approved for better interest rates with bad credit

• Can’t be used for all types of debt

How to decide which is right for you

Both DIY debt payoff and debt consolidation strategies aim to help you reach the same goal: getting out of debt faster. But there are some factors you can consider to decide whether the DIY debt payoff vs. debt consolidation strategy might work better in your case.

• How much you can afford: Debt consolidation loans carry the possibility of a lower monthly payment if you qualify for a lower interest rate. (You could also lower your monthly payment by getting a longer loan term, but this can mean staying in debt longer.) A DIY debt payoff plan generally means making all of your minimum payments, plus putting any extra cash toward your focus debt. The more you can pay toward your debt, the faster you could get rid of it. 

• What types of debt you have: Student loans and mortgage debts can be difficult to consolidate with other types of debt like credit cards or personal loans. But you could still include them in a DIY debt payoff plan.

• How much discipline you have: A debt consolidation loan could give you a pre-set payment pathway to follow since monthly payments are required. A DIY debt payoff plan means making your minimum payments then deciding how much extra to pay and where to put it each month.

• What type of debt consolidation loan you can get: If your credit score isn’t the greatest, it could be tough to get approved for a loan—and if you are approved, the higher rates lenders charge might not actually benefit you. Bad credit is less of an issue with a DIY repayment plan if you're not taking on new debt.

Example: Choosing the right approach for your situation

First, let’s see what kind of information you could use to help you make a decision. Find these numbers and write each of them down so you can reference them later:

• Debt details: Record the total balance and interest rate for each of your debts. 

• Total debt: Record the total amount of debt that you might be paying off with a debt consolidation loan. 

• Credit score: Check your credit score online. Your credit score could help you get an idea of what rates you may qualify for if you apply for a debt consolidation loan.

• Monthly budget: Check your monthly budget (or make one, if you don’t yet have one) to see how much—in total—you can afford for your monthly debt payments. 

Here’s an example. Maya is a hardworking mother of three in Ohio, looking to get rid of her debt so she can focus more on saving for her kids’ college. Here’s what she finds:

• Debt details: Maya has two credit cards. The first has a $750 balance and a 25% interest rate, and the second has a $2,500 balance and a 29% interest rate. 

• Total debt: Between the two cards, Maya has a total debt of $3,250. 

• Credit score: Maya has a 600 credit score, which is considered “fair” credit.

• Monthly budget: Maya can afford a monthly payment of $150. 

Maya checks her debt consolidation loan options by getting prequalified with a few lenders. She ends up choosing a debt consolidation loan with an 18% interest rate and a monthly payment of $118—well under her budget, which gives her wiggle room to pay her debt down faster, or save up for the future. She’ll reach debt freedom in three years.

Tips for choosing your strategy

Choosing between a DIY debt payoff vs. debt consolidation loan doesn’t have to be difficult. Here are a few final tips to help you make a confident decision:

• Be honest about your ability to stick with a debt payoff program, especially if you’re doing it on your own. 

• Get prequalified for a debt consolidation loan with a few lenders. It’s not a formal application, but it could give you an idea of your options.

• Use online calculators to help you do the math for which plan could work better for your situation. You can find a variety of debt snowball, debt avalanche, and debt consolidation loan calculators online. 

What’s next?

• Gather the details you’ll need to make a decision between a DIY debt payoff vs. debt consolidation loan: your credit score, debt details, and monthly budget.

• Look online for debt snowball or debt avalanche calculators, and debt consolidation calculators to see how each option affects your monthly payment, time to debt payoff, and your total interest paid.

• If you’re stuck trying to make the decision, that’s OK. Try chatting with a debt expert through a nonprofit credit counseling agency, or get a free debt evaluation.