Debt Consolidation vs. Personal Loans: What’s the Difference?
At a Glance
Personal loans can be used for a variety of reasons, including consolidating debt, while debt consolidation loans can only be used for debt consolidation. While they are similar, there are a few crucial differences, as well as advantages and disadvantages depending on your financial situation.
In this article, learn more about:
- Personal loans vs. debt consolidation
- Personal loans
- Advantages and disadvantages of personal loans
- Does a personal loan hurt your credit score
- Debt consolidation loans
- Advantages and disadvantages of debt consolidation loans
- Does debt consolidation hurt your credit score
- Which is better: Personal loan or debt consolidation?
- Alternatives to debt consolidation
- FAQs
Personal loan vs. debt consolidation
When it comes to personal loans vs. debt consolidation loans, they are the same thing. The biggest difference is that personal loans can be used for funding just about anything, while debt consolidation loans are specifically intended for consolidating and paying off existing debt.
Personal loans
Personal loans are offered by banks, credit unions, and online lenders. The funds can be used for just about anything, including home renovations, car repairs, medical bills, funding a vacation or wedding, large emergency expenses, and others.
When you are approved for a personal loan, you will receive a lump sum of money, typically ranging from $1,000 to $100,000. Then, you will make fixed payments each month to repay the loan. These payments will include interest and fees, or APR, over the loan’s term.
Most personal loans are unsecure, meaning you don’t have to use any assets as collateral to get approved. However, you are more likely to get better loan terms and interest rates if you have an excellent credit score.
Learn more: How do Personal Loans Work?
Advantages and disadvantages of personal loans
Advantages
- Funds can be used for about anything.
- Lower, fixed interest rates make budgeting easier.
- Have a definitive end date when the loan will be paid off.
- Loan approval and fund transfer can happen quickly, even within one business day.
- Can pre-qualify for the loan online and get an estimate of loan terms and interest rates prior to applying.
Disadvantages
- Interest rates will be high for borrowers with poor credit.
- Often have fees, such as origination fees, service fees, and others.
- If you do have a secure personal loan, meaning you must have collateral to qualify, you could lose that asset if you do not repay the loan.
Related: Pros and Cons of Personal Loans
Does a personal loan hurt your credit score?
A personal loan can negatively impact your credit score in a few ways:
- When you first apply for a personal loan, it will trigger a hard credit inquiry. This inquiry will lower your credit score by a few points for a short period of time. If you apply for multiple loans at once, your score can be more significantly impacted.
- If you have late or missed payments, your score can drop by up to dozens of points. That’s because payment history makes up 35% of your score, so late payments can have a huge impact.
On the other hand, making payments on time each month can help improve your score. Additionally, having a personal loan can help improve your credit mix, which can increase your score.
Debt consolidation loans
Debt consolidation loans are a type of personal loan but are solely used to consolidate debt. When you consolidate debt, you are combining multiple debts into one loan, ideally with a lower interest rate. This makes managing your debt payments easier and can help you pay off the loan faster and save money in the long run.
If you need a debt consolidation loan, you’ll apply for a personal loan in the amount you owe on your existing debts. Once you are approved, you will use those funds to pay off all your debt. Then, you will make payments toward your new loan, and pay it off over the term.
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