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Personal loan vs debt consolidation loan

The Consumer Financial Protection Bureau describes a debt consolidation loan as money you borrow to repay other debts, then repay as one amount. A personal installment loan can be used for that purpose, or for a purchase or an unexpected bill. Compare APR, fees, term, and total cost before you agree. A prequalification is not a loan offer.

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How a personal loan and a debt consolidation loan compare

The rows below follow the CFPB's personal installment loan page, its consolidation guide, its comparison of consolidation and related products, the FTC's guide to getting out of debt, and NCUA's debt consolidation options. This is general consumer information, not a loan offer.

Topic	Personal loan	Debt consolidation loan
What each is	A closed-end loan. You borrow a sum of money and repay it in fixed amounts, called installments, generally over a set period. The payments are generally the same throughout the loan.	Money you borrow to repay separate debts, then pay back as one amount over time. That simplifies how many payments you make. The NCUA also describes combining multiple debts into a single loan or line of credit.
Purpose	The CFPB says a personal installment loan may be used for a large purchase, unexpected expenses, or consolidating existing debt. The interest rate can be fixed or adjustable.	The purpose is to pay off other debts so those payments become one. The NCUA describes taking out a personal loan to pay off multiple debts as one way to consolidate.
How the money is provided	The lender gives you all of the money at the beginning. You generally repay it in set amounts over the period in the loan.	The CFPB describes a personal installment loan used to consolidate the same way: the lender gives you all of the money at the beginning. You use it to repay the other debts, then repay the new loan. The NCUA says the new payment goes to the consolidation loan provider.
When it may fit	When you need a set amount for a purchase or an unexpected expense, or you choose to use it to combine debts. The CFPB says working with more than one lender can help you compare terms.	When one payment would simplify several debts and you have compared the full cost. The CFPB says a consolidation loan probably will not help if you keep spending more than you earn, unless spending or income changes.
Costs to compare	Fees besides interest may apply. What a lender offers can depend on credit, income, debts, the amount and length of the loan, and interest rates permitted by state law.	The NCUA says these loans often come with upfront costs such as origination fees. The FTC says most consolidation loans have costs, and that you may have to pay points, with one point equal to one percent of the amount you borrow. The CFPB says a low rate may be a teaser rate, and a lower monthly payment may come from a longer term.

Personal loan

What a personal installment loan is

The Consumer Financial Protection Bureau describes a personal installment loan as a loan where you borrow a sum of money and pay it back in fixed amounts called installments. It is closed-end credit. The lender gives you all of the money at the beginning, and you generally pay it back in set amounts over a specific period. The payments are generally the same throughout the length of the loan. The NCUA describes installment credit the same way: you receive a lump sum up front and repay it in fixed installments over a set period.

Purpose is broader than debt payoff. The CFPB says these loans may be used for a number of personal reasons, including making a large purchase, covering unexpected expenses, or consolidating existing debt. A Federal Reserve research overview of personal loans describes the same range of uses, including debt consolidation, medical bills, vacations, or a large purchase. Interest can be fixed or adjustable. The CFPB says it is important to understand whether other fees apply, and that working with more than one lender can help you compare terms.

What you are offered is not one standard price. The CFPB says most lenders consider your credit score and reports, income, debts, the amount and length of the loan, interest rates permitted by state law, and other factors, such as bank account transactions. This page does not state a rate, fee, or approval odds. To see how this site describes the product, read personal loan options. Prequalification uses a soft credit inquiry and does not impact your credit score. It is not a loan approval.

Debt consolidation loan

What changes when the loan pays other debts

The CFPB describes a debt consolidation loan as money you borrow to repay separate debts, then pay back as one amount over time. That simplifies the number of payments. The loan might have a lower interest rate than the debts you have now. The FTC describes the same idea as one loan and one monthly payment, and says you might take out a personal debt consolidation loan from a bank or finance company. The NCUA lists taking out a personal loan to pay off multiple debts as a consolidation option, potentially with a lower interest rate or monthly payment.

The money is still a loan you repay. The CFPB's description of a personal installment loan used for consolidating existing debt is closed-end: the lender gives you all of the money at the beginning. The NCUA says installment credit works as a lump sum up front, repaid in fixed installments, and that after you consolidate you make one monthly payment to the consolidation loan provider instead of separate payments to each creditor. Those pages describe that up-front amount. They do not describe a separate way of sending the funds for a consolidation loan. The NCUA says to read the disclosures, which are the credit terms, before you agree.

A lower monthly payment is not the same as a lower total cost. The CFPB's consolidation guide says many low rates may be teaser rates that last only for a time, after which the lender may increase the rate. A lower monthly payment may exist because you are paying over a longer time. With fees included, you might pay more overall than if you kept your current payments. The same guide says a consolidation loan probably will not help you get out of debt if you keep spending more than you earn, unless you reduce spending or increase income. The FTC says most consolidation loans have costs, so do the calculations before you agree.

The NCUA says that with a personal loan used to pay off multiple debts, repayment terms are generally shorter because the loan is unsecured. It also says to assess the terms and fees of any consolidation offer. A home-secured loan is a different product. The FTC says some ways to consolidate, including a second mortgage or a home equity line of credit, require you to put up your home as collateral. If you cannot make the payments, or if payments are late, you could lose your home. The CFPB says the same risk for a home equity loan used to pay existing creditors: if you do not pay it back, you could lose your home in foreclosure.

Some ads that say consolidation are not this loan. The CFPB says many companies that advertise consolidation may actually be debt settlement companies, which often charge up-front fees and may tell you to stop paying creditors. For that difference, see debt relief vs debt consolidation. For when one payment may fit a budget, see is debt consolidation a good idea. To look at this site's consolidation prequalification, start with debt consolidation. Prequalification is not a loan approval or a commitment to lend.

Who offers them

Banks, credit unions, and other lenders

The CFPB says banks, credit unions, and installment loan lenders may offer debt consolidation loans. Its comparison page says the same loans can be offered by banks, credit unions, and other lenders. The FTC names a personal debt consolidation loan from a bank or finance company. A Federal Reserve paper on personal loans says banks, thrifts, and credit unions, together with finance companies, hold these loans, and that financial technology (FinTech) lenders also issue personal loans.

A credit union debt consolidation loan starts with membership. The NCUA says credit union members share a common bond, and that you may be able to join based on your employer, family, geographic location, or membership in a group. That brochure lists personal or signature loans among credit union loans, and it says to contact the credit union directly for availability. The NCUA also says profits are returned to members in the form of reduced fees, higher savings rates, and lower loan rates. That describes the credit union structure on the NCUA page. It is not a rate or fee for a loan you have not been offered.

Before you sign at a credit union, the NCUA's consumer loan guide says to know the dollar amount you are borrowing, the payment amounts and when they are due, the total finance charge (including all interest and fees you must pay to get the loan), and the rate of interest over the full term. It also says to be aware of penalties for late payments or for paying the loan back early, and of what the lender will do if you cannot repay. Unsecured loans do not use property as collateral. The NCUA says lenders consider those loans riskier than secured loans, so they charge a higher rate of interest. Availability and terms still depend on that credit union.

Before you agree

How to compare APR, fees, term, and total cost

Compare the same measure on each offer. The CFPB says a loan's interest rate is the cost you pay the lender for borrowing money, and that the annual percentage rate is a measure of the interest rate plus the additional fees charged with the loan. That includes origination charges and other fees charged when the loan is made. APR and interest rate are not the same, so compare APR with APR.

Origination fees are one of those costs to look for, not a fee this page assigns to every loan. The NCUA says debt consolidation loans often come with upfront costs, such as origination fees, which cover the financial institution's cost to start the account. It says to shop the fees and the terms before you agree. The CFPB's Regulation Z lists points, loan fees, and similar charges as examples of a finance charge, which is the cost of consumer credit as a dollar amount, unless a specific exclusion in that rule applies. The FTC says that, in addition to interest, you may have to pay points on a consolidation loan, with one point equal to one percent of the amount you borrow.

Term and total cost are on the closed-end disclosures. The CFPB classifies a personal installment loan as closed-end credit. For closed-end consumer credit other than a mortgage that uses the separate mortgage disclosures, Regulation Z section 1026.18 says the creditor must disclose, as applicable, the annual percentage rate, the finance charge (with a description such as the dollar amount the credit will cost you), the number, amounts, and timing of payments, and the total of payments (with a description such as the amount you will have paid when you have made all scheduled payments). The NCUA says the Truth in Lending Act lets you compare credit terms, and that you should review the disclosures for a debt consolidation loan.

A smaller payment can hide a longer term. The CFPB says that once the length of the loan, fees, and costs are included, you might pay more for the convenience of one payment than you would have paid on the original debts. Use the finance charge and the total of payments, not the monthly payment alone. This site does not guarantee a lower total cost. Prequalification is not a loan approval or commitment to lend. Loan amounts, rates, terms, and availability are subject to verification, underwriting, lender approval, and applicable law. Prequalification may use a soft credit inquiry that does not impact your credit score. If you choose to proceed with a full application, a hard credit inquiry may be required and could impact your credit score. The CFPB says soft inquiries do not affect credit scores, and that hard inquiries will impact your credit score.

FAQ

Common questions

The Consumer Financial Protection Bureau describes a personal installment loan as money you borrow and repay in fixed installments. It may be used for a large purchase, an unexpected expense, or consolidating existing debt. A debt consolidation loan is money you borrow to repay separate debts, then repay as one amount over time. The National Credit Union Administration lists taking out a personal loan to pay off multiple debts as one way to consolidate. A personal loan can have other purposes. A consolidation loan is borrowing used to pay other debts. Neither one guarantees a lower total cost.

It can be. The CFPB says a personal installment loan may be used to consolidate existing debt, and that banks, credit unions, and installment loan lenders may offer debt consolidation loans. The FTC says you might take out a personal debt consolidation loan from a bank or finance company. Consolidation can also be a different product. The FTC and the CFPB describe a second mortgage or a home equity loan as other ways to combine debts, and those can put your home at risk if you do not repay. A prequalification is not a loan offer.

The CFPB says a personal installment loan is closed-end credit: the lender gives you all of the money at the beginning, and you generally repay it in set amounts over a set period. The NCUA describes installment credit the same way. You receive a lump sum up front and repay it in fixed installments. For consolidation, you use that loan to pay off other debts, then make one payment on the new loan. The NCUA says to read the disclosures for the credit terms before you agree.

A personal loan may fit when you need a set amount for a large purchase, an unexpected expense, or to consolidate debt, which is how the CFPB describes those uses. A consolidation loan may fit when you want several debts converted into one payment and you have compared the full cost, including fees and how long you would repay. The CFPB says it probably will not help if you keep spending more than you earn, unless you reduce spending or increase income. A lower monthly payment may exist because the term is longer, and you might pay more overall once fees are included. A prequalification is not an approval.

Compare the APR with the APR, not an APR with an interest rate. The CFPB says the APR is the interest rate plus additional fees charged with the loan, including origination charges and other fees charged when the loan is made. The NCUA says debt consolidation loans often come with upfront costs such as origination fees, and that you should review the fees and the terms. For closed-end credit, Regulation Z disclosures include the APR, the finance charge, the payment schedule, and the total of payments. The FTC says most consolidation loans have costs, including interest and sometimes points, so calculate whether the loan is worth it to you. This site does not guarantee a lower total cost. Prequalification is not a loan offer.

Prequalification on this site uses a soft credit inquiry and does not impact your credit score. It is not a loan approval. If you choose to continue with a full application, a hard credit inquiry may be required and could impact your credit score. The CFPB says soft inquiries do not affect credit scores, and that hard inquiries, the checks lenders often run after you apply, will impact your credit score. Final approval, loan amount, rate, terms, and funding are subject to verification, underwriting, and lender approval.

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