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What‘s the difference between debt consolidation and personal loans?


A happy woman doing household budget at her cozy home.

If you have to make several debt payments each month, you may be thinking about debt consolidation. Personal loans can be used for debt consolidation, but there are also other ways to consolidate debt.

If you’re wondering about the difference between personal loans and debt consolidation, you’re in the right place.

Here’s what we’re going to cover:

  • What is debt consolidation?
  • What is a personal loan?
  • Personal loans and debt consolidation
  • Other loans for debt consolidation
  • Other ways to consolidate debt
  • Oportun: Affordable personal loans for debt consolidation

Key takeaways:

  • Debt consolidation is the process of paying off all your debts with a single loan or credit card. Taking out a personal loan is one way to do this.
  • Personal loans can be used to pay for a variety of expenses, such as medical bills, home improvements, car repairs, and big purchases. You can also use personal loans for debt consolidation.
  • Other methods of debt consolidation include home equity loans, 401(k) loans, balance transfer credit cards, and debt management plans. Each of these methods has benefits and drawbacks.

What is debt consolidation?

Debt consolidation is the process of grouping all your debts into a single account. When you take out a debt consolidation loan or credit card, you use that money to pay off all your existing debts. Then you owe just one debt payment each month.

There are several advantages to debt consolidation. First, you may find it easier to budget for a single payment. If you take out a loan with a fixed term and a fixed interest rate, all your payments will be for the same amount. You’ll know exactly how much you have to pay, and you can save time paying bills.

In addition, you may be able to qualify for a lower interest rate when you consolidate your debt. This allows you to save money on interest and can even help you get out of debt faster. Generally, you’ll need a high credit score to qualify for a low interest rate.

There are several ways to consolidate your debt. Taking out a personal loan is one way.

What is a personal loan?

A personal loan is money you borrow from a professional lender. It can be used to pay for a variety of personal expenses, such as medical bills, home improvement, and car repairs. Personal loans are also a popular tool to use for debt consolidation. Here’s why.

A personal loan will often come with a fixed interest rate and a fixed term. This means all your loan payments will be for the same amount, making them easy to plan for in your budget. Owing a single, predictable payment can be simpler than trying to make multiple payments. You may find this helps you get out of debt sooner.

You also have a choice between secured and unsecured personal loans. Secured personal loans require you to put up some kind of collateral, such as your car or home. These loans can be risky, because if you don’t make the payments on time, you could lose your collateral. However, they are often easier to qualify for and may come with lower interest rates than unsecured loans.

What is collateral?

Collateral is something of value that you agree to give your lender if you fail to make your loan payments on time. This could be your house, your car, or another large asset.

Unsecured personal loans do not require collateral, so they carry less risk for you as the borrower. Most personal loans are unsecured.

Personal loans and debt consolidation

So what’s the difference between personal loans and debt consolidation? And when are they the same?

Personal loans can be used for a variety of purposes. Debt consolidation is one of these purposes.

Debt consolidation can be accomplished by several different methods. Taking out a personal loan is just one of these methods.

Other loans for debt consolidation

Personal loans are just one type of loan you can use for debt consolidation. Here are two other types.

Home equity loans

If you own a home, you can take out a home equity loan to consolidate your debt. This type of loan borrows money directly from your home’s equity.

What is home equity?

Home equity is the difference between your home’s market value and the amount you still owe on your mortgage. You can think of home equity as the portion of your home that you currently own.

Home equity loans are usually riskier than personal loans because you have to use your home as collateral. If you can’t pay back the loan on time, you could end up facing foreclosure.

401(k) loans

Another option for debt consolidation is a 401(k) loan. With this type of loan, you borrow money from your 401(k) retirement account. Because you’re borrowing your own money, you don’t have to pay interest to a lender.

Which kind of loan should you choose for debt consolidation? It depends on your financial situation. For example, if you don’t own a home or have a 401(k) retirement account, a personal loan may be your best option. Personal loans are generally less risky and have fewer restrictions than other kinds of loans.

But loans are just one way to consolidate your debt. You could also try another method.

Other ways to consolidate debt

Here are two more tools you can use to consolidate your debt.

Balance transfer credit cards

A balance transfer credit card is another popular choice for debt consolidation.

Most balance transfer credit cards come with an introductory period when you don’t have to pay any interest. By transferring your entire debt to this card, you can take advantage of the zero-interest period, which typically lasts between 12 and 20 months. This will allow you to save money on interest while you’re paying off your debt.

If you do use this method, be careful to note how much the interest will be after the grace period ends. If the interest is too high, you could end up paying more for your debt in the long run.

Debt management plans (DMP)

If you’re struggling pay off multiple debts, you may also want to try a debt management plan, or DMP.

When you sign up for a DMP, you generally pay a fee to work with a professional credit counselor. This person will try to negotiate lower interest rates and more affordable monthly payments for you. By committing to such a plan, you may be able to consolidate your debt and pay it off faster.

Oportun: Affordable lending options designed with you in mind

Now that you understand your debt consolidation options, you can learn about how Oportun may be able to help you if you’re looking for affordable credit options.  Visit our homepage to learn about:

  1. Personal loans
  2. Credit cards
  3. Secured personal loans
  4. And more!


Consumer Financial Protection Bureau. Mortgages key terms

IRS. Retirement plans FAQs regarding loans

IRS. Retirement topics: Exceptions to tax on early distributions

Experian. A debt management plan: Is it right for you?


The information in this site, including any third-party content and opinions, is for educational purposes only and should not be relied upon as legal, tax, or financial advice or to indicate the availability or suitability of any Oportun product or service to your unique circumstances. Contact your independent financial advisor for advice on your personal situation.

Personal loans through Oportun subject to credit approval. Terms may vary by applicant and state and are subject to change. If you refinance, you may pay interest over a longer period of time or at a higher rate and the overall cost of your loan may be higher. Loans in CA, ID, MO, NM and WI are originated by Oportun, Inc. California loans made pursuant to a California Financing Law license. NV loans originated by Oportun, LLC. In AL, AK, AR, AZ, DE, FL, GA, HI, IL, IN, KS, KY, LA, MI, MN, MS, MT, NC, ND, NE, NH, NJ, OH, OK, OR, PA, RI, SC, SD, TN, TX, UT, VA, VT, WA and WY loans are originated by Pathward®, N.A.. Terms, conditions, and state restrictions apply.

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