photo: alancleaver2000

High-interest credit-card balances, crushing mortgage payments, student loans, car payments: if you feel like you’re barely holding your nose above water at the end of the month, it may be time to consider debt consolidation.

The idea: take out one low-interest loan to repay all those high-interest debts and breathe easier knowing you’ve got just one – and more affordable – payment to budget for each month.

That’s easier said than done these days, with lenders tightening the belt even for their most creditworthy candidates–but it’s certainly not impossible. Here are your options:

Tap Your Home Equity

Taking out a home equity loan or line of credit (also known as HEL and HELOC) used to be the most common form of loan consolidation in the real estate boom days, when banks were willing to lend to anyone who could sign on the dotted line.

With one in four homeowners under water (i.e. owing more to the bank than their home is worth) and ever tighter mortgage-lending standards, borrowing against your home equity is a strenuous process. Banks are still lending, but you’ll need perfect credit (a FICO score of at least 720, if not 740), says Keith Gumbinger, a vice president at HSH Associates, which tracks mortgage rates.  You’ll also need a sufficient equity cushion: together, all loans you have against your home cannot exceed 80% of the home’s value. (On a house that is now appraised at $200,000, that means you must owe no more than $160,000.)  That said, if you do qualify, the cost of borrowing against your home remains comparatively low: home equity loan rates now average 8%, while HELOC rates (which are typically pegged to the Prime rate) are around 5.5%.

Borrow From Your Peers

When banks started tightening their lending standards during the credit crunch, peer-to-peer lending gained traction with consumers. Borrowers who couldn’t find loans elsewhere headed to web sites like Prosper.com and LendingClub.com home.action to seek loans from, well, their peers: individuals with spare cash hoping to earn a higher yield offered by their bank.

Not surprisingly, the majority of loans made through Prosper and Lending Club these days (60% at either site) are consolidation loans.  Rates will depend largely on your creditworthiness – and on how much your prospective lenders are willing to pay. At Prosper, you need a minimum 640 FICO score to apply, rates range from 7.5% to 30%. (The borrower sets the maximum rate they’re willing to pay.)  At Lending Club, the minimum FICO score is 660; rates range from 6.39% to 21.64%. To be sure, those loans aren’t free: both sites charge origination fees as well. 

In addition to consolidating high-interest credit-card debt into a lower-interest loan, p2p lending can be good for your health, says Gerri Detweiler, a consumer credit adviser at Credit.com.  Prosper and Lending Club report debts to the credit bureaus as “installment loans,” which together with lower credit-card balances (presumably paid off through the p2p loan) can push up your credit score.

A word of caution: online consolidation loan scams are a dime a dozen these days and you should think long and hard before going with a loan offer you found on the internet. “At best, you’ll end up with a very high interest rate,” Detweiler says.  “At worst, you’ll be scammed.”

Take advantage of low-rate credit-card offers

These days, credit card companies certainly aren’t tripping over each other to mail out 0% APR offers. But if get one, you might as well take advantage, Detweiler says. Thanks to new legislation (known as the CARD Act), these offers are much more transparent and predictable than they used to be.  “Now issuers can’t retroactively raise your rate unless you fall 60 days behind [on payments],” Detweiler says.  “If you’re lucky to get one of these offers, at least you know what you’re getting.”

One caveat: watch out for high balance-transfer fees. Some banks these days charge as much as 5%, with no cap. That means shelling out a $500 fee for a $10,000 balance transfer.  And once the promo period is over, you’ll go back to paying the card’s regular APR.

Your 401(k)

Most financial planners will shriek in horror if you as much as hint at borrowing from your 401(k). “You’re mortgaging your future,” they’ll cry. “You’ll miss out on market gains and interest compounding!” You get the picture. For the most part, they’re right: 401(k) accounts should be funded, not depleted.  But if you’re carrying a 27%-APR credit-card balance around your neck, you may be better off taking care of that first. (After all, why pay someone 27% while earning far less?)

The good thing about borrowing from your 401(k) is that any interest that you pay you’ll pay for yourself, says Detweiler. The rates are pretty low, too: still in the low single digits.  But because these loans typically need to be repaid within five years, your monthly payments may remain high.  “Many people realize [after taking on a loan] it doesn’t provide as much relief as expected,” Detweiler says. 

The biggest risk with 401(k) loans: should you leave your job, voluntarily or not, most companies require that you pay back the loan, pronto. Fail to do so, and it will be considered a “hardship withdrawal,” which means you’ll owe income tax on the outstanding balance, plus a 10% early distribution penalty if you’re younger than 59 1/2.

The bank of Mom and Dad

They say that friendship and money don’t mix, and with good reason: too many a friendship has been ruined by loans gone bad and awkward loan-collections attempts.

If you must borrow from a friend and relative – even your parents – make sure you document the loan, says Detweiler. This will not only keep the Internal Revenue Service happy, it will give your lender peace of mind, too. Online services like LendingKarma.com offers a loan forms kit for as little as $14.95. (For $59.95, you get all necessary forms to document the loan, plus payment tracking and year-end reporting that will come in handy at tax time.)