Guide to Debt Consolidation Loans vs. Personal Loans: Key Differences to Know

Q: Can debt consolidation hurt your credit score?

Borrowers may see an initial dip in their score from the credit inquiry, but the effect should quickly turn to the positive as their debt-to-income lowers and credit utilization improves.

Q: Are debt consolidation loans personal loans?

Yes, debt consolidation loans are often personal loans used to combine multiple debts into a single payment. These loans typically have fixed interest rates and repayment terms, making them a structured way to manage debt. However, other options like home equity loans or balance transfer credit cards can also consolidate debt.

Q: Why do people consolidate debts?

People consolidate debts to simplify repayment, reduce interest rates, and lower monthly payments. By combining multiple debts into one loan, they can manage finances more efficiently, avoid missed payments, and potentially build credit scores. Debt consolidation can also provide a structured repayment plan, making it easier to become debt-free.

Guide to Debt Consolidation Loans vs. Personal Loans: Key Differences to Know

Lauren WardUpdated March 26, 2025

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

If you have high-interest debt, you may be able to consolidate that debt using either a personal loan or a debt consolidation loan. A debt consolidation loan is a type of personal loan that is used specifically to repay other lenders and combine high-interest debt into one lower-cost balance. A personal loan, on the other hand, can be for consolidating debt, as well as for other purposes, such as paying for a large purchase or covering an emergency expense. Which type of consolidation loan will work best for you will depend on several factors, including how much you need to cover your debt balances and if you plan to use the funds for purposes other than just paying down debt. Here’s what you need to know when comparing personal loans vs debt consolidation loans.

What Is Debt Consolidation?

Debt consolidation is when you take out a new loan to pay off other consumer debts. Instead of making payments each month on several credit cards or other loans, you only make a single payment. The point of getting a loan for debt consolidation is that it can offer more favorable payment terms than your existing debts, such as a lower interest rate or a lower monthly payment. This can help you pay less in total and potentially get out of debt faster.Recommended: 8 Ways to Consolidate Credit Card Debt

What Is a Personal Loan?

A personal loan is a type of installment loan (meaning it’s a set amount of money that gets paid back over a set period of time) that can be used for almost any personal expense, such as a home renovation, a vacation, medical expenses, or debt consolidation. You can get personal loans from banks, credit unions, and online lenders in amounts ranging from $1,000 to $100,000 (or more), depending on the lender and your qualifications as a borrower. In most cases, personal loans are unsecured, which means you don’t have to put up an asset, such as a car or home, as collateral for the loan. A lender will instead look at your credit, income, and debt-to-income ratio to determine whether you qualify for a personal loan, as well what the rate and terms will be. Generally, to get a good interest rate, you’ll need good to excellent credit — the higher your credit score, typically the better your rate will be. Recommended: How a Personal Loan Can Affect Your Credit Score

How Personal Loans Work

The way personal loans work is that once you are approved, you will receive the loan amount (principal) in one lump sum as a check or direct deposit to your checking or savings account. You can then use the money to pay off your outstanding debt, as well as other purposes.Keep in mind that some lenders prohibit the use of a personal loan to pay off student debt, so if that’s your intention, you’ll want to make sure it’s allowed by the lender before you apply.Your first installment payment (which will include both principal and interest) is typically due one month after you receive the funds. The repayment period, known as the loan term, can be anywhere from two to seven years.Recommended: Guide to Payday Loan Consolidation

What Is a Debt Consolidation Loan?

A debt consolidation loan is a type of personal loan that is designed to be used to pay off existing debts in order to lower a borrower’s interest rate, streamline payments, and otherwise improve loan terms. Debt consolidation loans typically offer lower interest rates than most credit cards, depending on your credit score, and allow you to budget for a single, predictable monthly payment. Like other personal loans, debt consolidation loans are typically installment loans, which means you’ll pay the loan back (plus interest) via fixed monthly payments over a set period of time. Unlike general personal loans, the loan amount you can get will be based on your current debt balances, and some lenders cap the amount at $50,000 or less. Debt consolidation loans typically have repayment terms of one to five years.You’ll generally need good to excellent credit to qualify for a debt consolidation loan. Some lenders offer debt consolidation loans for borrowers with low credit scores, but interest rates will likely be higher. Debt consolidation loans are available through banks, credit unions, and online lenders.

How Debt Consolidation Loans Work

Once you’re approved for a debt consolidation loan, you may receive the funds in a lump sum via a check or direct deposit. You would then use the money to pay off your existing debts, such as credit card balances, the remainder of your car loan, or the outstanding balance on other personal loans.In some cases, however, the lender will pay off those debts directly, saving you a few steps. Either way, once the debts are cleared, you will start paying off the debt consolidation loan each month according to the terms of that loan.Recommended: Guide to Debt Consolidation Loans for Veterans

Debt Consolidation vs. Personal Loans

Personal loans can be used for almost any purpose, while debt consolidation loans are designed to be used to pay off several debts and streamline your monthly payments into one fixed amount. Both types of loans typically offer lower interest rates compared to credit cards. So, which should you use, and what’s the difference?The main difference between personal loans and debt consolidation loans is the purpose of the loan — whether it will be used for personal expenses or for debt consolidation. With a debt consolidation loan, the loan amount is based on the existing loan balances you’re looking to consolidate, and the funds you receive from the loan need to be used for paying off those debts. In some cases, the lender will pay off those debts directly.When you borrow money with a personal loan, on the other hand, you will receive it in one lump sum, either via check or direct deposit. You can then decide how you want to use that money – whether that’s to pay off debt, for personal expenses, or a combination of the two.

Pros and Cons of Debt Consolidation Loans

Pros of Debt Consolidation Loans	Cons of Debt Consolidation Loans
Lender may pay off your debts for you	Can initially hurt your credit score
Streamline your monthly bills	Loan may have an origination and other upfront fees
Can save money on interest	Loan amounts may be limited
Boost credit if monthly payments are made on time	If you opt for a longer loan term, you could end up paying more for your debt

Pros of Debt Consolidation Loans

On the plus side, a debt consolidation loan allows you to streamline your debt payments and simplify your finances, since you’ll only have one payment to keep track of and budget for. Another advantage is that the lender may pay off your debts for you. You just need to give them your account information and they’ll take care of everything. In addition, your payments may be lower, since debt consolidation loans will typically have a lower interest rate than credit cards. Debt consolidation loans can also help you build your credit profile.

Cons of Debt Consolidation Loans

On the downside, applying for a debt consolidation loan can initially hurt your credit scores. In addition, these loans sometimes come with some hefty upfront costs, such as origination fees or balance transfer fees, which could reduce or wipe out the savings on interest. Also, keep in mind that debt consolidation loans can typically only be used to cover your debt, and amounts may be limited. If the loan isn’t large enough, you may still have some debt payments to make. Finally, if you opt for a longer loan term, you could end up paying more for your debt over the life of the loan.Recommended: How Does Debt Consolidation Affect Your Credit Score?

Pros and Cons of Personal Loans

Pros of Personal Loans	Cons of Personal Loans
Lower interest than credit cards	May initially lower credit score
Money can be used for a variety of purposes	May have an origination and other fees
Large loan amounts are available	Can initially damage your credit score
Using it to consolidate debt can help boost credit with consistent, on-time payments	Consolidating debt with a long-term loan could lead to higher borrowing costs

Pros of Personal Loans

As with a debt consolidation loan, using a personal loan to pay off debts can help simplify bookkeeping, lower your interest rate, and build your credit profile. Unlike a debt consolidation loan, a personal loan can be used for any purpose, which could be helpful if you want to use the loan to not only consolidate debt, but also cover additional expenses. Personal loans also typically come with higher limits than debt consolidation loans.

Cons of Personal Loans

Also like debt consolidation loans, applying for a personal loan may initially hurt your credit. Plus, you may get hit with an origination and other initial fees. And, extending your loan term could ultimately lead to higher costs.

Alternative Forms of Debt Refinancing

Taking out a personal or debt consolidation loan is one way to consolidate debt, but it’s not the only one. Here are some other options.

Balance transfer credit cards: You may be able to get a balance transfer credit card that offers a 0% annual percentage rate (APR) for up to 21 months, which could be useful for consolidating smaller debt. If you are able to pay the new card off within the introductory period, you would not have to pay any interest on that debt. If you don’t pay the full balance off during that time, however, you could potentially end up with a higher rate than you are currently paying. Also, be aware of balance transfer fees that could potentially eat up your savings on interest.
Home equity line of credit (HELOC): If you’re a homeowner and have equity in your home, you might be able to use a HELOC to consolidate your debt. Because a HELOC is secured by your home, you might get a lower rate compared to a personal loan or debt consolidation loan. However, there is risk involved – you could lose your home if you end up not being able to make the payments.
401(k) loans: You may be able to take a loan from your employer-sponsored retirement account to pay off your debt. This may give you access to lower interest rates, and you will pay the interest to yourself. However, not all 401(k) plans allow loans, and if you don’t repay the loan on time, you can get hit with taxes and high fees.

The Takeaway

Both personal loans and debt consolidation loans can be used to consolidate debt, lower your monthly payments, and streamline your finances. The main difference between these two lending options is that debt consolidation loans are designed specifically for consolidating debt, whereas personal loans can be used for a wide variety of purposes.If you’re interested in consolidating your debt, consider Lantern by SoFi. With Lantern, it’s easy to review and compare personal loan offers from multiple lenders. It only requires one application and there’s no obligation to you.Find personal loan offers with Lantern.

Frequently Asked Questions

Can debt consolidation hurt your credit score?

Are debt consolidation loans personal loans?

Why do people consolidate debts?

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About the Author

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.

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