Debt Consolidation vs. Personal Loan

Posted on May 15, 2023

Borrowing money to get out of debt may seem like a strange choice, but for many people taking out a loan to consolidate debts while working to tackle and limit their spending is the first step to taking control of unpaid bills and unsustainable credit card balances.

While there are several ways to consolidate debt, choosing a personal loan to pay down other loans is usually the most effective. That said, not all personal loans are ideal for debt consolidation. We’ll compare debt consolidation vs. personal loans, consider what makes a good debt consolidation loan, and when you should consider some alternatives.

Which Is Better: Personal Loan or Debt Consolidation?

While some banks and credit unions offer “debt consolidation loans,” these are fundamentally the same as a personal loan from the same lender. At the same time, there are important things to look for that will make a particular personal loan an effective debt consolidation loan. Let’s start by clarifying what we are talking about.

What Is Debt Consolidation?

Consolidating debt means transferring money you owe to several creditors into a single account. To do this you borrow a lump sum from a single source, usually at a lower interest rate or over a longer term, and use this to pay off all or some of your outstanding debts. 

Debt consolidation can be an effective route to taking back control of your finances, but it needs to be part of a larger plan to track and control your spending while continuing to pay off debt.

What Is a Personal Loan?

A personal loan is a lump sum borrowed from a bank, credit union, or other lender that is paid back over an agreed period of time in fixed installments. Personal loans can be used for any purpose the borrower sees fit. They usually have a fixed interest rate and are not typically borrowed against a fixed asset that is used as collateral.

What Is a Debt Consolidation Loan?

While personal loans are used to cover all sorts of short- to medium-term funding needs when they are used to pay off other higher-interest loans they are known as debt consolidation loans. A good debt consolidation loan has favorable terms designed to help the borrower reduce risk and pay off the loan in a timely manner.

How Does Debt Consolidation Work? 

By borrowing additional money to pay off your existing debts, debt consolidation allows you to replace higher-interest debt on credit cards, outstanding bills, or other borrowings with a single lower-interest loan. This has several advantages:

  • You limit the interest you would have paid on higher-interest debt
  • You make fewer monthly payments
  • You pay less in fees, including late payment penalties and overdraft fees
  • You get out of debt sooner
  • You improve your credit score

A good debt consolidation strategy, whether making use of a personal loan or another source of credit, should help you achieve many or all of these alternatives.

When Should You Consider Debt Consolidation?

Debt consolidation may be a good idea if you are beginning to build up significant balances on one or more credit cards. You should consider a debt consolidation strategy if:

  • You are juggling balances on several credit cards
  • You are struggling to pay off several bills or store accounts
  • You are incurring regular overdraft charges on your checking account
  • You are regularly paying penalties for missed payments

The right debt consolidation strategy (possibly including a personal loan) combined with a long-term commitment to avoid further high-interest borrowing as well as sticking to an effective monthly budget, should allow you to escape what could become an unsustainable debt trap.

When Shouldn’t You Consider Debt Consolidation?

If, however, you have maxed out one or more credit cards, or you are using one credit card to pay off another, or you have multiple accounts that have already been sent to collections—your credit score has likely been severely damaged.

Therefore, you will struggle to borrow further at a low enough rate to be able to consolidate your debts. In this case, you should approach your creditors directly or seek help from a debt counseling program.

Benefits of Using a Personal Loan to Consolidate Debt

If you are committed to consolidating your debts, then a personal loan offers significant advantages over other debt consolidation alternatives.

Single Lump Sum

You’ll replace multiple sources of debt, including hard-to-manage revolving credit balances, with a single manageable lump sum that you can work to pay off over time.

Lower Rates

In most cases, a personal loan will attract a lower interest rate than the high-interest penalty or credit card rates you are using it to replace. That can mean smaller payments every month and big savings over time.

Fixed Schedule

Personal loans are paid off in fixed installments. You’ll always know how much you still owe and when you will be debt free, even if interest rates change.

Predictable Payments

Rather than juggling multiple payments, you’ll have a single, fixed payment due at the same time every month. 

Lower Fees

You’ll spend less on fees, including credit card annual fees, late and missed payment penalties, and bank overdraft fees. And, if you get your personal loan from a credit union like Partners Financial Federal Credit Union, you’ll avoid common loan processing and pre-payment fees.

Improve Your Credit Score

Exchanging high-interest credit card scores and overdue accounts for a single, lower-interest fixed-rate debt will help you begin rebuilding your credit score, so you can qualify for better rates when you are ready to borrow for things you really need like a car, student loan, or home. 

Debt Consolidation Alternatives

There are several alternatives to using a personal loan for debt consolidation. Each of these comes with its own advantages and disadvantages.

Balance Transfer Cards

Balance transfer credit cards allow you to borrow a lump sum to pay off other high-interest loans, often without fees or payments during an introductory period. This can be a good way to get some breathing space if your credit card balances are small, but you are still replacing your hard-to-handle high-interest debt with another source of high-interest borrowing.


Home equity lines of credit (HELOCs) work a lot like credit cards, offering a relatively affordable revolving credit secured against your home. It can work to pay off high-interest debt if you pay down your HELOC balance immediately. 

But, unless you owe a very large amount, the cost of taking out a HELOC will outweigh any savings—plus you need to own a home to qualify for one!

Home Equity Loans and Cash-Out Refinancing 

These other forms of borrowing can help to pay off very large debts but at a significant cost. 

Once again, the fees associated with accessing this kind of funding will probably outweigh the interest saving you hope to achieve. You’ll also reduce the equity you have worked hard to build in your property, and will ultimately put your property at risk by using it to pay off shorter-term loans.

What to Look for in a Debt Consolidation Loan

Compared with these options, a personal loan offers an affordable, flexible, and convenient way to turn high-interest, short-term debt into manageable long-term borrowing—without the need to use your home, car, or a cash lump sum as collateral.

This is especially true when you choose a personal loan that is structured as a debt consolidation loan. A good debt consolidation loan includes:

    • A low, fixed annual percentage rate (APR)
    • Low or no application or prepayment fees
    • Longer-term borrowing to reduce monthly payments
    • No collateral requirements

Partners Financial FCU: With Us, It’s Personal

At Partners Financial FCU we know that borrowing money can be intimidating, even if you plan to use the cash to build a long-term future for you and your family in the greater Richmond area. As a local, member-owned credit union, we offer flexible, unsecured personal loans at great rates and we always take the time to get to know you and understand your financial needs.

Talk to us about how we can help you structure a personal loan that meets your debt consolidation needs. All of our personal loans offer: 

  • Fixed rates, fixed terms, and fixed monthly payments
  • No origination or prepayment fees
  • Competitive APRs for the life of the loan
  • No collateral requirements

Membership at Partners Financial FCU is open to anyone who lives, works, worships, attends school, or volunteers in the City of Richmond or in Chesterfield, Hanover, or Henrico counties. Whether you’re a Cap City native or a newcomer looking for a great place to put down roots, we’re here to help you build a better future in central Virginia. 

Contact us today or click below to learn more about how you can use a Partners Financial FCU personal loan to better manage your debt.


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