Using borrowed capital strategically can support long-term financial progress. But not all loans serve the same purpose—especially when your goal is improving cash flow and simplifying debt.

If you’re managing multiple balances across credit cards or short-term loans, you may be considering a personal loan or a debt consolidation loan. While the two are closely related, they’re designed for slightly different objectives.

In this article, we’ll break down the difference between personal loans 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 that can be used for debt consolidation, home improvements, liquidity management, and unexpected expenses.
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 you can use for a variety of purposes, including emergencies, 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 how you intend to use the loan with the lender when you apply.

Benefits of 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 you'll know how much you’ll pay each month and your exact payoff date on the day you sign for the loan.
Have flexible repayment terms: Personal loans tend to have long repayment terms, which helps keep monthly payments low. With BHG Financial, you can get a personal loan with terms up to 10 years,^1,2 giving you more flexibility in your budget.
Don’t require collateral: Since many 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, 24-month personal loans had an average interest rate of 11.65%, while credit cards averaged 20.97%.

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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, education loans, or other high-interest debts.

Since a debt consolidation loan is for the explicit purpose of paying off debt, you usually can’t use the money for other purposes. Depending on the lender, payment may go directly to your existing creditors without you even seeing the funds.

Benefits of 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. but consistent on-time payments help boost your credit score. Paying down revolving balances can also positively impact your credit utilization. The average BHG debt consolidation borrower sees their FICO® score increase by more than 30 points within a few months of funding.

Key differences between a personal loan and debt consolidation loan

While both products are structurally similar, their purpose and execution differ.

	Personal loan	Debt consolidation loan
Primary purpose	Flexible funding for various needs	Combine multiple existing debts
Use of funds	Broad (home projects, consolidation investments, liquidity management)	Paying off high-rate debts
Structure	Fixed-rate installment loan	Fixed-rate installment loan
Payment schedule	One predictable monthly payment	One predictable monthly payment
Impact on credit	History of on-time payments may boost score	Often reduces utilization by paying off credit cards
Strategic role	Liquidity and cash-flow management tool	Debt reorganization and simplification tool

When should you choose a personal loan or 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 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 plans to finance a new 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 $250,000,¹ and repayment terms of up to 10 years,^1,2 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.

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^† This is not a guaranteed offer of credit and is subject to credit approval.

Personal vs. debt consolidation loan FAQs

Is it smart to get a personal loan to consolidate debt?

It can be. 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.

Can you use a personal loan for debt consolidation?

Yes. A debt consolidation loan is simply a personal loan used for a specific purpose—paying off existing debts. Many borrowers choose a personal loan and allocate the funds toward credit card balances or short-term loans. The key difference is intent. If the loan is structured and used solely to reorganize debt, it functions as a consolidation tool. If flexibility is needed for multiple uses—such as debt consolidation and home improvement—a general personal loan may offer broader utility.

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^† This is not a guaranteed offer of credit and is subject to credit approval.

Not all solutions, loan amounts, rates or terms are available in all states.

¹ Terms subject to credit approval upon completion of an application. Loan sizes, interest rates, and loan terms vary based on the applicant's credit profile.  

² Personal Loan Repayment Example: A $60,000 personal loan with a 7-year term and an APR of 17.06% would require 84 monthly payments of $1,191.38.

No application fees, commitment, or impact on personal credit to estimate your payment.

Consumer loans funded by Pinnacle Bank, a Tennessee bank, or County Bank. Equal Housing Lenders. Equal Housing Lenders icon

For California Residents: Personal loans made or arranged pursuant to a California Financing Law license - Number 603G493.