Debt Consolidation vs. Personal Loans

Most consumers have no idea what the differences are between a personal loan and a debt consolidation loan. Quite often, they get confused as to which option they should select when they find themselves looking for financial relief. For the most part, these loans are very similar, and this, unfortunately, is where the confusion stems from. The one thing that does make them different though, is their overall structure, so here we will take a look at the main differences.

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Who Handles the Money?

One of the biggest ways that these loans are different is who handles the funds. In other words, when you get approved for the loan, there are a couple of ways they can be disbursed.

If you are receiving a debt consolidation loan the borrowed money gets distributed to your debtors, and then the money that was used, is opened in a new account that you will be paying off. Essentially, you are taking all of the bills and throwing them into one pot and paying them off with one simple payment. If nothing else, this helps simplify your financial life.

On the other hand, if you need immediate access to funding, so that you can receive a lower interest rate on your existing debt, sometimes you will take control of the funding yourself.

This allows you to control how funds are distributed, and in theory, you should find a lower interest rate overall. This requires a bit more footwear, but obviously it can be important, depending on the situation you find yourself in. 


Make sure to keep in mind that security or collateral can be part of the equation as well. Debt consolidation loans or programs, as well regular personal loans, don’t normally include any collateral, but it’s important to be aware that it can happen. Obviously, your credit score has a massive influence as to how it is all played out, so be aware that the higher the credit score, the better off you are going to do with these loans.

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Be Cautious

If you do find yourself needing to collateralize some type of loan, homeowners typically have a better chance of this as they have real estate to back the loan. However, you should be cautious about this because if you find yourself in serious financial trouble,you could put your home at risk. Automobiles also can be put up as collateral if they are paid off, but again you don’t want to lose this asset either. While putting up your assets as collateral is not always the ideal choice, it may be your only option so make sure you fully understand the consequences.

Credit Cards as Debt Consolidation

One other option that you can look into, beyond these loans, is a 0% APR balance transfer card. This of course assumes that you can qualify for one. Here, you are able to put all of your debt on one card and pay it down as quickly as possible, perhaps within the 0% APR time frame.

Granted, this is something that not everybody can qualify for,but if you find yourself into a bit of financial trouble and have historically made your payments on time when it comes to credit, you may be able to use this option and finance your own debt consolidation.

Simplicity or Flexibility, It’s Your Call

In general, the easiest way to think of the difference between these loans is that if you do debt consolidation, a creditor will take on all of your debt and put it into one account.

This allows you to make one payment every month and simplifies your financial situation on a month-to-month basis. This will be true whether you get a debt consolidation loan or consolidate your loan on a 0% APR credit card.

On the other hand, if you can apply and secure a personal loan, you have more flexibility. You can pay off some debts quicker than others, or perhaps use the financing to do more than just pay off your debts. Be sure to compare personal loan rates and find the best deal possible.

However, you need to be very careful doing this especially if you have had a spending problem in the past. The last thing you need to do is find a solution that only creates more problems in the long-term. As a general rule, most people choose the simplicity of debt consolidation, as it is the first step in getting things under control.