Edited by Samuel MountjoyHow Are Debt Consolidation Loans and Personal Loans Different?
Quick Answer
Debt consolidation loans are simply personal loans that you use to pay off multiple debts. Consolidating debts might simplify your finances, lower your bills and save you money.
A debt consolidation loan is a loan you take out to pay off other debts, which effectively consolidates multiple loans into one. Many people use unsecured personal loans this way, and you'll likely come across lenders that advertise their personal loans as debt consolidation loans. We're also referring to personal loans when we use the term "debt consolidation loan" below, but note that not all personal loans are debt consolidation loans.
What Is a Personal Loan?
A personal loan is an installment loan that you can use for almost anything. Loan amounts commonly range from $1,000 to $50,000, and some lenders offer up to $100,000.
Like other installment loans, you receive the entire loan amount upfront and then repay it with periodic (often monthly) installment payments over a predetermined period. Some lenders charge an origination fee when you receive the loan, but there's generally no penalty for repaying the loan early.
In addition to consolidating debt, people might take out personal loans to pay for major expenses, including medical bills, car repairs and vacations. You don't have to use the loan funds for a single or specific purpose, and most lenders place only a few limitations on loan uses. For example, you might not be allowed to use the proceeds for educational expenses, to buy investments or to do anything illegal.
Learn more: What Can a Personal Loan Be Used For?
Secured vs. Unsecured Personal Loans
Most personal loans are unsecured, meaning you'll qualify based on your creditworthiness, which can include your credit history, credit score, income and debts. If you fall behind on the loan, the lender can report the late payments to the credit bureaus, might start collection attempts and could sue you for the unpaid debt.
Some lenders also offer personal loans secured by funds locked in a savings account, certificate of deposit or investment account with the lender. It can be easier to qualify for a secured loan, and you might receive a lower rate. But in addition to the consequences listed above for failure to repay an unsecured loan, the lender can seize the collateral to help cover your past-due amount if you fall behind on secured loan payments.
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What Is a Debt Consolidation Loan?
A debt consolidation loan is a personal loan that you use to pay off other debts and consolidate multiple bills into one.
While lenders sometimes highlight the benefits of debt consolidation when marketing personal loans, such as lowering your monthly payment or interest rate, there's no special type of loan for debt consolidation. Your decision to use a personal loan to pay off other debts makes it a debt consolidation loan.
You can also use other types of loans to consolidate debts, such as a personal line of credit, a home equity loan or a home equity line of credit. But debt consolidation is often advertised as a way to use the funds from those accounts rather than as an alternative name for the loan or line of credit itself.
Learn more: What Is Debt Consolidation and How Does It Work?
Do Personal Loans Affect Credit Scores?
A personal loan can help or hurt your credit score in several ways. In general, your scores will improve over time if you make your monthly payments as agreed. Opening a new account can hurt your score for a few reasons, but debt consolidation can have positive long-term benefits.
How a Personal Loan Can Improve Your Credit
A personal loan can improve your score in the following ways:
- You'll have fewer accounts with balances. If you're paying off other loans and credit cards, you'll have fewer accounts with a balance, which could be good for your score.
- You'll potentially improve your credit mix. Having a mix of revolving and installment accounts could also be good for your score. The personal loan will add to your credit mix if you don't already have an open installment loan.
- You might lower your credit utilization ratio. Your credit utilization ratio is the ratio of your cards' balances to their credit limits, and it can significantly impact your credit scores. Paying down credit card balances with a debt consolidation loan can lower your utilization ratio, and lower is best.
- You can build a positive payment history. Making your debt consolidation loan payments on time can add more positive payment history to your credit report, which helps your score.
How a Personal Loan Can Hurt Your Credit
You may notice your score drops when you take out a debt consolidation loan because:
- You'll have a new hard inquiry. Applying for a personal loan can lead to a hard inquiry, which may temporarily hurt your credit score by a few points.
- You'll have a lower average age of your accounts. The new loan will lower the average age of your credit accounts because it's brand new. A higher average age is best for your credit.
- You'll have a high-balance account on your report. While a high-balance installment loan isn't as bad for your score as maxed-out credit cards, it could still be a negative factor if you need credit in the near future.
- You might miss a payment. While this isn't unique to debt consolidation loans, remember that missing even one payment could significantly hurt your score.
Pros and Cons of Personal Loans for Debt Consolidation
A debt consolidation loan might sound like a good idea if you're juggling multiple bills, and it can be when the circumstances are right. But consider the pros and cons before you apply for and take out a new loan.
Pros
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Fewer monthly payments: The convenience of replacing multiple bills with a single monthly payment could be reason enough to consider a debt consolidation loan.
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Lower monthly payments: Your monthly payment will depend on your loan amount, rate and repayment term. If you qualify for a low interest rate or choose a long repayment term, you may be able to lower your monthly bills and free up your money for other expenses.
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Lower monthly payments: Your monthly payment will depend on your loan amount, rate and repayment term. If you qualify for a low interest rate or choose a long repayment term, you may be able to lower your monthly bills and free up your money for other expenses.
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Fixed interest rate: Most personal loans have a fixed interest rate, which can offer stability while you're paying off the loan. In contrast, credit cards often have a variable rate that automatically rises or falls when a benchmark rate changes.
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Potential interest savings: You might qualify for a personal loan with a lower interest rate than your current loans or credit cards. In the fourth quarter of 2025, credit card holders who were paying interest had an average 22.30% annual percentage rate (APR) on their cards, but a 24-month personal loan had an average 11.65% APR, according to Federal Reserve data.
Cons
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Upfront fees: Some lenders charge an upfront origination fee that's added to your loan's balance. The fee might range from 1% to 6% of the loan amount, and you'll want to include this in your calculations to make sure debt consolidation makes sense.
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Additional interest: Even if your monthly payment goes down, you might wind up spending more on interest if you accept a loan with a long repayment term.
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Unfavorable terms: There's no guarantee you'll qualify for a large enough loan to consolidate all your debts, or that you'll get a lower interest rate than you're currently paying. If you have poor credit, you might want to focus on improving your credit before applying.
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Increased temptation to spend: If you tend to overspend and you're consolidating your credit card debt, freeing up your credit limit might be too tempting. If you wind up getting back into credit card debt, you'll owe more money overall.
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Temporary credit score drop: Applying for and taking out a debt consolidation loan might hurt your credit scores at first, which could be a big con if you're preparing to apply for an auto loan, mortgage or other important loan.
Is a Debt Consolidation Loan a Good Idea?
A debt consolidation loan might be a good idea if your goals and circumstances align. Look into the option if:
- You have multiple outstanding debts, especially if they have high interest rates
- You have a good to excellent credit score
- You have a debt payoff plan and are confident you can follow through
- You're not preparing to apply for a major loan
However, resist the temptation to run up new balances on the credit cards you paid off with the loan. Making card and loan payments could put you over budget, undo the credit score benefits of lowering your utilization rate and defeat the original purpose of the loan.
Keep reading: Is a Debt Consolidation Loan Right For You?
How to Get a Debt Consolidation Loan
Applying for a debt consolidation loan can be a relatively simple process, but you don't necessarily want to go with the first offer you receive. Follow these steps to make sure you don't overpay or borrow more than you need:
- Assess your finances. Review the loans and credit cards you want to pay off and list their monthly payments, interest rates and remaining balance. You'll use this information to determine how much to borrow and whether accepting a debt consolidation loan offer makes sense.
- Check your credit. If you haven't checked your credit recently, it's a good idea to check at least one of your scores to see where you stand. You can start by checking your FICO® ScoreΘ for free from Experian.
- Get prequalified with several lenders. A loan prequalification will tell you whether you'll likely get approved, and the terms you'll receive, without impacting your credit scores. You can go lender by lender to compare offers, or view offers matched to your credit profile all in one place.
- Apply for the best loan. Compare the best offer to the terms of your current loans to make sure the math works in your favor. Ideally, you'll want to lower your interest rate and monthly payment. If everything looks good, follow the lender's instructions to apply.
- Pay off other debts. You might be able to have your new lender send payments directly to your outstanding creditors. If not, you can have the funds deposited into your bank account and make the loan and credit card payments yourself.
Learn more: Step-by-Step Checklist to Getting a Consolidation Loan
Alternatives to a Debt Consolidation Loan
A personal loan isn't the only option if you're looking to consolidate debts. Before applying, also consider the following alternatives and whether they might be a better fit.
Other Types of Loans
Consolidating unsecured debt (such as credit card debt) with a secured loan isn't necessarily a good idea because you're taking on the additional risk of potentially losing your collateral if you miss payments. However, if you have a large safety net and the secured loan offers a much better rate, that may be a risk worth considering.
Balance Transfer Credit Cards
Some credit cards offer a promotional interest rate on balances you transfer to the card. These balance transfer cards may give you an introductory 0% APR on transferred balances for up to 21 months. While there's often a 3% to 5% balance transfer fee, you could still come out ahead as you avoid new interest charges while paying down the balance.
Review the offer's terms carefully to make sure this is a good option. For example, if the card doesn't have a promotional rate for purchases, your purchases might accrue interest even if the transferred balance doesn't. Also, keep in mind that you might not be approved for a high enough credit limit to transfer all your debts.
Learn more: What Is a Balance Transfer?
A Debt Management Plan
Some nonprofit credit counseling organizations offer debt management plans (DMPs) as a service if you have unsecured debts, such as credit card debt. After meeting with a credit counselor to discuss your debt and options, you may be able to enroll in a DMP with the organization. The counselor will then contact your credit card issuers to negotiate better repayment terms, such as lower interest rates and waived fees.
With a DMP, you'll make a single monthly payment to the counselor, who will distribute payments to your creditors. The plans generally lead to paying off your debts within three to five years, and they could save you money overall and free up cash for other purposes. However, you may also have to close your credit card accounts and avoid opening or using any credit cards while you're part of the DMP, which could cause your credit score to drop.
Learn more: Is a Debt Management Plan Right for You?
Debt Settlement
Debt settlement companies offer to negotiate with your creditors and settle your outstanding debts for less than you currently owe. While there are some legitimate companies that do this, debt settlement should only be considered if you're already behind on payments and can't access other consolidation options.
You're generally instructed to stop making debt payments, which can hurt your credit and lead to additional fees. And these negative marks and fees can stick even if the debt settlement company isn't able to negotiate a favorable settlement. If the company negotiates a settlement, it will take a portion of your savings as its fee.
Research companies before enrolling or paying to ensure the company is legitimate and reputable. You could also try negotiating a settlement on your own before contacting a debt settlement company.
Learn more: Ways to Consolidate Credit Card Debt
Frequently Asked Questions
Check Your Credit and Loan Offers
Keeping an eye on your credit scores and getting preapproved for personal loans can be good first steps if you're considering a debt consolidation loan. If you don't want to go lender by lender to compare offers, you can use your Experian account to check offers from reputable online lenders and monitor your credit for free.
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About the author
Louis DeNicola
Louis DeNicola is freelance personal finance and credit writer who works with Fortune 500 financial services firms, FinTech startups, and non-profits to teach people about money and credit. His clients include BlueVine, Discover, LendingTree, Money Management International, U.S News and Wirecutter.
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