Using funding resources outside your own to build wealth can be highly beneficial, but not all loans offer the same advantages — especially if you want to increase your net worth as a high earner. If you find yourself juggling several debts to various lenders, you might be looking for a way to streamline debt repayment using a single, low-interest loan. That’s where personal loans and debt consolidation loans come in. In this article, we’ll break down the difference between personal and debt consolidation loans to help you decide the best option for your unique financial situation.
Key Considerations
- Personal loans are versatile, unsecured loans with fixed payments and flexible terms, used for various purposes, including home improvements and emergencies.
- Debt consolidation loans specifically combine multiple high-interest debts into one loan, simplifying payments and potentially lowering interest rates.
- Choose a personal loan if you need funds for diverse uses and a debt consolidation loan if you want to streamline and reduce existing debt payments.
What is a personal loan?
A personal loan is a versatile, unsecured loan that you can use for a number of reasons, with some of the most popular being emergency needs, medical bills, weddings, funerals, and debt consolidation. While the use cases for personal loans are broader than some other loans, there are still limits to how you can use the funds from a personal loan, and you’ll need to share the loan use with the lender when you apply.
While some individuals may look to personal loans to start a business, it’s worth closely considering whether a personal or business loan is better for your needs. A personal loan may make more sense if your business is new and you’ve yet to establish business credit. However, a small business loan may help protect your personal assets in the event of non-payment.
Why choose a personal loan?
People generally choose personal loans as a borrowing option because they:
- Have fixed monthly payments: Personal loans have fixed interest rates and set repayment schedules, meaning the day you sign for the loan, you know how much you’ll pay each month and your exact payoff date.
- Have flexible repayment terms: Personal loans tend to have long repayment terms. With BHG Financial, you can get a personal loan with terms of up to 10 years1,2, giving you more flexibility in how long you’ll have the loan and helps keep your monthly payment low.
- Don’t require collateral: Since personal loans are unsecured, you won’t need to back the loan with collateral like your home or car. Instead, lenders use your personal credit score and income to assess your eligibility.
- Tend to have lower interest rates than other types of debt: According to Federal Reserve data from May 2024, 24-month personal loans had an average interest rate of 11.92%, while credit cards averaged 21.51%.
What is a debt consolidation loan?
A debt consolidation loan is a type of personal loan intended to help you combine multiple high-interest debts into a simple monthly payment, ideally at a lower interest rate. Debts typically consist of unsecured debt, including credit cards, other personal loans, medical loans, private student loans, or other high-interest debts. Since a debt consolidation loan is for the explicit purpose of paying off debt, you can’t use the money for other purposes. Depending on the lender, payment may go directly to your existing creditors without you even seeing it first.
Why choose a debt consolidation loan?
Borrowers may choose a debt consolidation loan for several reasons, including:
- Simplified debt management: It’s far easier to manage a single monthly debt payment than trying to remember minimum monthly payments and due dates across several debt obligations.
- More favorable interest rates: Since people often use debt consolidation loans to combine credit card debt, shifting the high-interest debt to a lower-interest-rate loan can result in significant savings on interest over time.
- Potential to improve credit score: Managing multiple debts could result in late or missed payments. If you can commit to making the payment for a personal loan, you may be rewarded with a boost to your credit score.
When should you use a personal loan vs. a debt consolidation loan?
The question to ask yourself to decide between a personal and debt consolidation loan is, “What do I intend to use the money for?”. Since debt consolidation is a very specific use case, that type of loan only makes sense when you want to save money and streamline debt management by consolidating multiple high-interest debts into a single loan. However, if you have other plans for the funds, including home improvements or a new business venture, you may opt for a personal loan instead.
Explore personal and debt consolidation loans with BHG Financial
If you’re unsure which type of loan is best for your situation, BHG Financial’s dedicated concierge support team can help. With personal loans of up to $200,0001, and repayment terms of up to 10 years1,2, you can find the right personal loan to meet your strategic financial needs. Explore personal and debt consolidation loan options with your estimated monthly payment.
Personal vs. debt consolidation loan FAQs
Is it smart to get a personal loan to consolidate debt?
Using a personal loan to consolidate debt may be smart if your credit score is high enough to qualify for a lower interest rate than you’re currently paying on debt. If you’re struggling to make debt payments due to insufficient income, debt consolidation through a personal loan may not help you achieve your financial goals.
Do debt consolidation loans hurt your credit?
Applying for any loan may cause a short-term dip in your credit score due to the hard inquiry that is placed on your credit report when a lender checks your report. However, a debt consolidation loan may actually improve your credit score over time. By consolidating multiple debts into a single loan, you simplify your repayment process, which can make it easier to make payments in full and on time—two key factors that could positively impact your credit score.
