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Debt Consolidation Vs Personal Loan

Home » Guides & Tips » Debt Consolidation Vs Personal Loan

Personal Loan

  • Rapid funding potential

  • Fixed interest rate and payments

  • Excellent for emergency use

  • Flexible repayment term potential

  • Can be used to consolidate debt

  • Long-term credit score benefit potential

  • No collateral necessary

  • Multiple uses for funds

Personal Loan Features

A personal loan is a loan from a lending institution such as a bank, credit union, online fintech organization, or other lender that doesn’t require collateral, the funds of which are usable for many purposes. Personal loans, sometimes referred to as signature loans, provide funding for things like emergencies, vacations, major life event spending, medical bills, vehicles, business ventures, boats and recreational equipment, and debt consolidation.

Personal loan funding is generally fast, within a few days or weeks, and consists of a fixed interest rate and fixed monthly payments for a predetermined number of months. The dollar amount of a personal loan can be anywhere from a few hundred dollars to over $100,000, depending on lender and state regulations. Repayment terms generally range from 12 to 144 months.

  • Usable for numerous purposes
  • Personal loan amounts range from a few hundred dollars to $100,000
  • Loan terms from 12 to 144 months
  • Interest rates from 5.99% – 35.99%
  • Origination fees from 0.99% – 12% may apply
  • A fair or better credit score is necessary for most approvals
  • Usable for debt consolidation

Personal Loan Facts

Personal loans are typically available at most lending institutions. Because no collateral is necessary, your credit score, history, and other factors will determine the interest rate and specifics of your personal loan. In general, the better your credit score and history, the lower your loan interest rate will be.

When applying for a personal loan, you’re requesting to borrow a specific amount of money with a promise to repay the debt in equal monthly installments for a prearranged duration at a fixed interest and payment rate. However, most personal loans in most states can be paid off early without penalty, depending on the loan contract terms.

Funding from personal loans is usable for many purposes. However, some lending institutions offer different types of personal loans for various purposes. For instance, a lender may offer different interest rates and terms for a debt consolidation personal loan than a loan to cover a home renovation project.

Personal Loan Interest Rates

Interest rates on personal loans tend to be higher than loans with collateral attached but less than typical credit card interest rates. Typical personal loan interest rates vary widely from around 6% to over 36%. If your lender offers various types of personal loans for different purposes, it may offer higher or lower interest rates or APR based on that information. The interest rate assigned to your personal loan will remain the same for the life of the loan repayment period.

Personal Loan Terms

Typical loan terms for personal loans range from 12 to 144 months. Many lenders cap the repayment period to a specific duration depending on loan type and amount. Most personal loans are repayable over 12 to 60 months. Personal loans differ from revolving credit, credit cards, and lines of credit in this respect.

Loan origination fees often apply to personal loans. An origination fee is simply an added cost of borrowing and is sometimes referred to as an administration fee or other term. Origination fees may be collected by the lender in the form of a payment at loan origination, added to the loan balance, or deducted from the loaned amount. Loan origination fees typically range from around 1% to 12% or more if applicable.

Pros and Cons of Personal Loans Examined

While there are multiple pros to taking out a personal loan, there are also some cons to consider before committing to one.

Personal Loan Cons

  • Interest rates. While personal loan interest rates are generally lower than credit card APR, the interest you owe is a direct reflection of your credit score, history, and other factors—meaning it could be higher than a typical auto or other loan APR with collateral.
  • Origination fees. Not exclusive to personal loans but more common than with other loan types, origination fees can significantly increase the loan cost.
  • Lack of collateral. Not having collateral involved with a loan can create the sense that making on-time payments isn’t as critical as for other loan types. This thought process can jeopardize a borrower’s credit score and future eligibility for borrowing money.
  • Increased debt. Taking on an additional monthly payment increases a borrower’s debt load, increases their debt-to-income ratio, and will factor into future loan approval odds.
  • Credit report inquiry. Applying for a personal loan requires a hard inquiry on your credit report, which will temporarily impact your credit score. Accepting a personal loan will create a new loan account on your credit report, which will lower the average age of your credit history and affect your score for a time.
  • Missed payments are costly. Making on-time payments on your personal loan can quickly negate any credit score drops from the loan origination. However, missing or making late payments is generally accompanied by steep late fees and adverse reports to credit bureaus, which can hurt your credit score and history for several years.

Best For

Personal loans are best for borrowing money to fund uncommon or infrequent expenses. Unlike credit cards or lines of credit, personal loans are well suited to borrowing a specific amount of money to cover the cost of a designated event or item. The best personal loan companies offer personal loans for multitudes of purposes from major-item purchases to paying off medical debt or even credit card and other debt consolidation.

Debt Consolidation

  • Money-saving potential

  • Condenses multiple monthly payments to one

  • Can decrease the amount of time to pay off debt

  • Potential interest rate reduction

  • Potential for lower monthly payment amount

  • Long-term credit score benefit potential

  • Can reduce debt-to-income ratio

Debt Consolidation Features

A debt consolidation loan from a lending institution such as a bank, credit union, fintech company, peer lending organization, or other lender is essentially a personal loan designed to combine more than one debt into a single loan and payment. Debt consolidation often called a debt consolidation loan, typically requires no collateral and is structured like personal loan borrowing.

Debt consolidation loan funding is generally quick, within a few days or weeks. The personal loan associated with debt consolidation carries a fixed interest rate with fixed payment amounts for a pre-specified number of months. A debt consolidation loan is usable for consolidating almost any kind of debt but is most common for combining multiple unsecured or revolving debts. Dollar amounts for debt consolidation loans range from several hundred dollars to $100,000, with repayment terms from 12 to 144. However, most consolidation loans are under $50,000 with terms ranging to 60 months.

  • Used to combine multiple debts into a single loan and payment
  • Amounts typically range from a few hundred dollars to $50,000
  • Typical loan terms from 12 to 60 months
  • Interest rates from 5.99% – 35.99%
  • Origination fees from 0.99% – 12% may apply
  • Credit score requirements vary widely by lender
  • Most commonly used to consolidate unsecured debts

Debt Consolidation Facts

Many lending institutions offer debt consolidation loans in the form of unsecured personal loans. Like a personal loan, no collateral is typically necessary to obtain the loan. Instead, the borrower’s credit score, history, debt-to-income ratio, and other factors determine eligibility, loan terms, and APR.

When applying for a debt consolidation loan, the first step is determining the amount of money you owe and wish to consolidate. Next, determine the interest rates and the total cost of paying off the debts without consolidation. Finally, apply for the loan and determine that you’ll save money with consolidation before accepting the loan terms.

With a debt consolidation loan, you’ll borrow a fixed amount of money, generally adequate to pay off existing debt with the funds. The loan will have a fixed interest rate, payment, and payback length. However, you can pay off most debt consolidation loans early without penalty, depending on the loan terms stated in the contract and according to state regulations.

In some cases, when getting a debt consolidation loan, the lending institution may have provisions to pay your existing lenders directly to expedite the consolidation process. However, most lenders simply turn over the loan funding to the customer. The customer can then pay each lender the full amount they owe or a portion thereof with the loan funds.

Debt Consolidation Loan Interest Rates

Like personal loans that don’t require collateral, interest rates on debt consolidation loans are generally higher than other collateral-based loans but less than typical credit card interest rates.

However, when obtaining a debt consolidation loan, ensure the interest rate over time will amount to less than paying your other debt’s interest rate over a shorter period. Typical debt consolidation loan interest rates range from around 6% to 36% and are unique to each loan based on the borrower’s creditworthiness and other factors.

Debt Consolidation Loan Terms

While debt consolidation loan length terms can be as much as 144 months, most borrower’s payback periods range from 12 to 60 months, with shorter durations, around 24 to 36 months being the most common. Debt consolidation loans differ from credit card and revolving debts because they’re fixed loan amounts paid off over a fixed timeline.

Loan origination fees often apply to debt consolidation loans. An origination fee amounts to a paid sum as an additional cost of acquiring the loan. If an origination fee applies, it can range from 1% to over 12% of the borrowed amount and is sometimes paid upfront or as part of the loan. Origination fees may also go by the name of administration fees, processing fees, or other terms.

Pros and Cons of Debt Consolidation Examined

A debt consolidation loan can be a useful debt management tool. However, borrowers need to remain vigilant to protect themselves from some of the downsides of debt consolidation borrowing.

Debt Consolidation Loan Cons

  • Interest rates. While the interest rate you accept on a debt consolidation loan will likely be less than your other interest rates, paying off debt over a long time can result in paying more interest than you would have by paying down debts individually and faster.
  • May not fix the root problem. Before committing to a debt consolidation loan, it’s important to understand why the current level of debt exists and make spending habit changes if necessary to avoid future debt trouble.
  • Frees up available borrowing ability. By paying off credit cards with consolidation and keeping the accounts open, debt consolidation customers can create more borrowing power than their budget can handle.
  • Origination fees. Calculate the total cost of origination fees when applying for debt consolidation to ensure you’ll still save money consolidating your debts after paying the additional amount.
  • Lack of collateral. Like any other unsecured personal loan, a lack of collateral can seemingly lessen the importance of making on-time payments, which could result in creditworthiness problems in the future.
  • Increased debt potential. A debt consolidation loan can lower your DTI and free up borrowing power. This fact can result in more borrowing for some consumers and lead to financial and creditworthiness problems.
  •  Credit report inquiry. Obtaining a debt consolidation loan requires a hard inquiry on your credit report and will generate a new loan, which can lower your average credit age. Both of these scenarios can have a temporary negative effect on your credit score.
  • Missed payments are costly. Despite the potential for lowering your overall monthly debt payments, missing or making late payments tends to come with high late fees and adverse credit reporting.

Best For

Debt consolidation loans are best when there’s a significant amount of available money savings by taking advantage of potentially lower interest rates or monthly payment amounts. Debt consolidation is best for borrowers with fair to excellent credit who can qualify for a lower interest rate on a debt consolidation loan than they’re paying for other unsecured debts.

Table of Contents

The primary difference between a personal loan and a debt consolidation loan has little to do with the loan itself and more to do with how consumers use the funding. The application processes can differ slightly in that when consolidating debt, it’s wise to account for the details of current debt balanced against the pros and cons of consolidation.

Who Are Personal Loans Best For?

Personal loans are best for borrowers with credit scores over 650 who need to fund a one-time or occasional purchase or necessity. While borrowers with lower credit scores can often obtain a personal loan, consideration of higher interest rates or origination fees may come into play.

Who is Debt Consolidation Best For?

Debt consolidation loans are best for borrowers looking to combine multiple debt payments into one, usually to save interest money over the long term or reduce their overall monthly debt payments. Borrowers with higher credit scores will likely realize lower interest rates and origination fees than those with lower scores. However, many lenders will approve debt consolidation loans for those with less-than-excellent credit scores in return for a higher interest rate.

Debt consolidation isn’t necessarily limited to those with good credit. Some lenders offer debt consolidation loans to those with less-than-stellar credit. The difference is that the interest rates on debt consolidation loans for poor credit borrowers are typically higher than for those with good credit. Exercise caution to ensure that debt consolidation will save money in the long run in these cases.

Before committing to a debt consolidation loan, remember that many of the best debt consolidation companies offer a non-commital pre-qualification step that allows you to see what interest rate and loan terms you may qualify for before taking a hit on your credit report.

How Do Interest Rates Work?

Interest rate and APR or annual percentage rate are interchangeable terms. However, there are two important types of interest on debt to understand. The interest you pay on debt is simply the cost of borrowing. Banks and other lenders charge an interest rate when they lend money. The interest rate is part of the lender’s income for assuming the loan risk. The interest rate borrowers pay is part of their payment installment amounts.

The two types of debt interest important when discussing personal loans and debt consolidation are simple interest and compound interest. Personal and debt consolidation loans are typically subject to simple loan interest, while revolving credit, such as credit card debt, often uses compound interest.

The difference between simple and compound interest is where a debt consolidation loan can help save money over paying off credit cards one at a time, and where obtaining a personal loan to cover a large expense can be more beneficial than using credit cards to cover the cost.

Simple interest is calculated by adding the interest rate percentage to the total loan amount and dividing that amount between payments over the loan’s term. Compound interest is calculated by adding interest onto the existing balance at each payment increment. The balance may consist of both principal and earlier accumulated interest. It’s common to pay interest on interest accrued earlier when dealing with compound credit.

Simple Vs. Compound Interest Example

To illustrate, assume a $10,000 simple interest personal or debt consolidation loan with a 24-month term versus a $10,000 compound interest credit card balance, both with a 25% APR,  paid over the same time frame with the minimum monthly payment.

Simple Interest Equation

  • $10,000 loan at 25% simple interest
  • Interest amount = $2,500
  • Total loan amount= $12,500
  • Minimum payments = $520.83
  • Balance after 24 months = $0

Compound Interest Equation

  • $10,000 credit card balance at 25% compound interest
  • Required Minimum Payment = $300 (3% of balance)
  • Total amount paid after 24 months = $7,200
  • Interest amount = $1,497.57
  • Balance after 24 months = $8,502.43
  • Remaining payment duration = 36 months

Personal Loan Vs Debt Consolidation Loan: Which is Better?

Answering the question about which is better, a personal or debt consolidation loan, depends on how you’ll use the funds. Many consumers use a personal loan to pay for unusual expenses and consolidate some debts at the same time. Deciding which financial product will work best for your situation depends on your needs.

Personal Loan Debt Consolidation
Typical Interest Rates 6% – 36% 6% – 36%
Typical Loan Length 12 – 144 months 12 – 60 months
Typcial Credit Score Requirements 650 and higher 600 and higher, varies widely by lender
Typical DTI ratio Requirements 35% Varies by lender

Long-Term Personal Loan Vs. Short-Term Personal Loan

When choosing a personal loan or committing to a debt consolidation loan, the length of time it takes to repay the debt is an essential consideration. Long-term personal and debt consolidation loans over 36 months tend to consist of lower payments but slightly higher interest rates—The monthly payment may be easier to make, but you’ll ultimately pay more in interest over the life of the loan.

On the other hand, loan terms of 36 months and less often feature lower interest rates, which you’ll pay for a shorter time—saving money in two ways. However, the monthly payment will be substantially more than with a longer-term loan.

When making your loan term decision, balance the long-term interest expenditure against the monthly payment you can afford.

Top-Rated Debt Consolidation and Personal Loans

(Compare Interest Rates and Credit Score Requirements)

Lender Fixed (APR) Loan Amounts
Minimum Credit Score
Upstart Personal Loan 6.40% to 35.99% $1,000 to $50,000 620
LightStream Personal Loan 7.49% to 25.49% $5,000 to $100,000 700
Discover Personal Loan 7.99% to 24.99% $2,500 to $40,000 660
PenFed Credit Union Loan 8.49% to 17.99% $600 to $50,000 700
Upgrade Personal Loan 8.49% to $35.99% $1,000 to $50,000 600
Sofi Personal Loan 8.99% to 25.81% $50,000 to $100,000
Does Not Disclose
Best Egg Personal Loan 8.99% to 35.99% $20,000 to $50,000 600
LendingClub Personal Loan 9.57% to 35.99% $1,000 to $40,000 660
Avant Personal Loan 9.95% to 35.99% $20,000 to $35,000 550
Universal Credit Personal Loan 11.69% to 35.99% $1,000 to $50,000 560
OneMain Financial Personal Loan 18% to 35.99% $1,500 to $20,000
Does Not Disclose
Zable Personal Loans 8% to 30% $1,000 to $25,000 600
Happy Money Debt Consolidation Loan 11.72% to 24.67% $3,000 to $40,000 640

Source: Best Personal Loans in 2024 for Fair Credit Applicants 

How to Choose a Lender

Choosing a personal or debt consolidation loan lender is more than simply calling the bank. A little research is necessary to get the best deal, help save money, and avoid hassles. Online lenders, traditional banks, and credit unions all offer these loans with varying perks, benefits, and drawbacks.

On the other hand, many online lenders offer a pre-qualification step that can estimate your approval odds and loan terms before you commit to a hard inquiry. The other side of that coin is that you may pay somewhat higher interest rates for the added credit score security.

Whichever route you choose, look for specifics of these features when selecting a personal loan or debt consolidation lender:

  • Interest rate
  • Origination fees
  • Loan length term options
  • Late payment fees
  • Pre-qualification if desired
  • Extra perks, such as credit monitoring or account benefits
  • Online and local review source ratings

Best Personal Loan and Debt Consolidation Lenders

While numerous excellent personal loan lenders are available, all featuring their own perks and benefits, we’ve rounded up the best ones according to our strict grading criteria.

Frequently Asked Questions

Which bank is best for a personal loan?

Is debt consolidation a good idea?

Do debt consolidation loans hurt your credit?

Do personal loans damage your credit?

What is the disadvantage of loan consolidation?


A debt consolidation loan can be a personal loan. However, not all personal loans are debt consolidation loans. One isn’t necessarily better than the other. Personal loans are usable for numerous reasons, while debt consolidation is for a more defined purpose. The difference lies not in origination but in how the consumer uses the funding.

About Author

Dr. Ali
Who is Deane Biermeier? In the dynamic realms of finance and home improvement, a luminary has emerged over the last decade—Deane Biermeier. Widely recognized as the go-to expert for insightful reviews and content, his prolific writings grace esteemed publications, including Forbes,, U.S. News and World Report, LifeWire, Family Handyman, and several others. He also acts as an expert consultant for The Spruce and Family Handyman. In 2023, Deane joined the esteemed team at, solidifying his status as a sought-after authority. What sets Deane Biermeier apart? His writing isn't merely informative; it's a delightful blend of honesty, expertise, and entertainment. Deane's crafted content aids millions of consumers, steering them away from pitfalls and toward near-perfect purchases. feels blessed to have Deane on their team, and now you, too, can be blessed with his insightful writing. Dive into some of Deane's latest reviews on personal loans, credit monitoring, identity theft, and related topics and industries. Follow Deane Biermeier to read his exciting newest reviews, soon to come in 2024! In the upcoming year, Deane has queued up an exhilarating series of reviews that you won't want to miss. He'll be uncovering the inside scoop on cutting-edge products designed to enhance the security of your finances, starting with credit card reviews as 2024 starts. Don't forget to bookmark Deane's author bio page before you navigate away from this page! All of Deane's newest reviews will be featured right here on his author profile page. If you appreciate Deane's insightful reviews and find them helpful in making informed decisions, please consider sharing this author bio on your social media channels. No fluff, just the unbiased facts that matter are what you'll discover with Deane Biermeier's reviews. You won't get sold by anyone, and it's not a marketing gimmick but rather the stuff you need to know before making a purchase. Deane's passion goes beyond mere technical expertise; he believes in the transformative power of knowledge. His commitment lies in equipping consumers and homeowners with the necessary resources to make informed decisions, guiding them with confidence throughout their home improvement projects and when facing financial choices. Determining the right credit cards or personal loans amidst a myriad of companies vying for your business can be stressful and challenging. Dealing with fast-talking salespeople can often result in poor decisions, as individuals may be misled by enticing portrayals, only to discover later that reality falls short of expectations after becoming a client and paying upfront costs. Such situations can be avoided by following Deane's reviews and gaining insight from the information he shares. His reviews illustrate the facts about companies and products, sharing customer experiences that occur after the sale, enabling individuals to make informed choices and avoid potential pitfalls. Deane's insights are not just recognized but actively sought after by leading publications like Forbes Home,, USNews, Family Handyman, and Lifewire. He consistently delivers credible, unbiased information, providing readers with the confidence to navigate the intricacies of home improvement and finance. Deane is more than a writer; he is your trusted partner in realizing your home improvement dreams. Combining decades of hands-on experience with meticulously researched insights, he offers practical guidance and financial knowledge to support you at every step of your journey.
Dr. Ali

Deane Biermeier

Last Updated: January 3, 2024

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