The Difference Between Debt Consolidation & Personal Loans

A confused man holding papers on personal loans and debt consolidation

Did you know that according to research done by Experian the average American household has over $92,000 in debt? Many of these families are seeking ways to reduce this debt load and increase the amount that they have in savings. There are many different ways that debt can be managed, whether it be consumer debt, a bank loan, or a mortgage. A personal debt loan and debt consolidation are just a few of the options that many people investigate. In this easy-to-use guide, we are going to look into some of the most common debt solutions, and provide information that will help you to make the best possible decision regarding the right solution for the financial health of your household.

Best Personal Loans

Dealing with Debt with a Personal Loan

While you can use a personal loan to consolidate debt, debt consolidation also can be expanded to include credit counseling. This is especially true for borrowers that have run up their credit cards and have fallen behind on their payments.

So, is there a difference between a personal loan to pay off debt and a debt consolidation loan? 

Technically, there is not much of a difference between a personal debt loan or a debt consolidation loan. Debt consolidation just happens to be one of the reasons for taking out a personal loan.

A personal loan can be used for just about anything a borrower chooses, including consolidating medical debt, credit card debt, or covering emergency repairs. It can also be used to fund an upcoming wedding, vacation, or home renovation. When you take out a personal loan, you have no restrictions concerning its use.

You can take out this type of installment credit in amounts ranging from $1,000 to $20,000. In some instances, a personal loan may cover amounts as much as $100,000. Unlike a secured loan, this type of unsecured credit, such as a mortgage, does not require collateral. A lender can sell the collateral or property used for the loan for repayment for a secured loan. Therefore, a personal loan is much less risky than a collateralized loan or secured funding. 

Because you are not limited to how you can use a personal loan, it is easy to take one out for just about anything. A personal loan can be a financial lifesaver – so keep this in mind, especially if you need emergency funding. If you know you can repay the loan, using it for a vacation or a dream purchase can be exciting and rewarding. 

When you get approved for an online personal loan, you will typically receive a lump sum payment in the form of a direct deposit to your checking account. The money you receive can be spent as you wish. Your first installment payment usually is due a month after you receive the proceeds.

Dealing with Debt with a Debt Consolidation Loan

A debt consolidation loan represents an online personal loan that you use to manage your other debts and obligations. While a lender may highlight the advantages of debt consolidation when advertising a personal loan, no particular classification exists for debt consolidation financing. What makes a personal loan a debt consolidation loan is how the borrower uses personal loan funds.

When you use a personal debt loan to pay off your credit cards and the remainder of a car loan, for instance, you are paying off several debts at once. In turn, you only need to make one easy payment each month. Therefore, a personal loan to deal with debt entails getting rid of several charges and substituting them with one installment payment.

Many borrowers like the convenience of switching out a large number of bills for one easy monthly installment. Therefore, a debt consolidation loan can prove to positive for managing your household budget.

One of the significant benefits associated with a personal loan to handle your debt load is the lower loan costs. Usually, you can take out a personal debt loan and save on the higher interest charges on your credit card bills. While the median rate for credit cards hovers around 16%, the average rate for a 24-month personal debt loan is typically approximately 10%.

Naturally, what you will pay in interest will depend on your credit score. You will get the best personal loan deals for a score of over 740. However, you can also find some reasonable APRs with lenders who are willing to work with borrowers with lower credit ratings.

When you use a personal loan to manage your debt, you also reduce your credit utilization ratio. This ratio measures the percentage of your credit borrowing limit as it pertains to outstanding credit card balances. If your credit utilization ratio surpasses 30%, you will typically have a lower credit score. Therefore, using a personal loan as a debt consolidation loan can improve your credit rating.

When you add a personal loan to your credit portfolio, you can also promote a higher credit rating. You have more of a mix of credit, which tends to push your credit rating upwards. Because one missed payment can negatively affect your credit score, make sure you can afford the cost of a personal loan before you apply for it.

While you can transfer credit card balances onto another credit card, the interest rates on a personal loan are usually lower. Transferring balances to a card with a 0% introductory rate may seem enticing. However, it would be best if you still use caution. Once the period for the initial rate passes, you will still be responsible for the unpaid portion of the debt at a much higher interest rate.

Best Personal Loans

Whatever reason you have for applying for a personal loan can prove to be helpful. So, can a debt consolidation loan. While a personal loan can be adapted to just about any funding need, a debt consolidation loan is one reason you can use a personal loan for funding.

Would you like to rebuild your credit? How about your budget? Is it manageable? 

Do you, like many Americans, have many credit card bills, medical payments, or car loans that make up your portfolio? 

If you do, you can use a personal debt loan to take care of the obligations conveniently. Doing so can help you raise your credit score, reduce your credit utilization rating, and improve your debt-to-income (DTI) score.

If you do not need a debt consolidation loan but would like to take out a personal loan to pay for a significant purchase or cover an emergency expense, you can easily do so. The funds for a debt consolidation loan or personal debt loan can be deposited into your checking account in as little as a couple of days.

Look at the loan products today online that offer these financing advantages. See how you can take some of the strain off your household budget or pay for an item or service that will increase your quality of living. Apply for a personal loan for debt consolidation or any other reason today.

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