You might have heard of debt consolidation loans to help pay down multiple debts. You might have also wondered, what’s the difference between personal and debt consolidation loans? Here's what you need to know.
How They Stack Up
The difference between a debt consolidation loan and a personal loan is nothing really. A debt consolidation loan is simply a personal loan used to consolidate debts. While you might see it advertised as a debt consolidation loan, they aren’t different from personal loans. A personal loan becomes a debt consolidation loan if you use it in that manner.
Personal Loan Basics
Now that we’ve cleared that up, let’s look at the nuts and bolts of a personal loan. A personal loan is an installment loan that you (typically) repay in monthly payments. The loans usually range from $1,000 to $20,000 and can be used on anything you want. Rates and terms will vary.
Benefits
If you use your personal loan to consolidate debt, there are a few benefits:
- Lower Rate. Personal loans often have lower interest rates than credit cards and other forms of debt.
- One Easy Monthly Payment. If you consolidate your debts, now you’re paying just one bill instead of many.
- Fixed Rate. Most personal loans have a fixed interest rate, so you’ll know your rate every time.
Considerations
For loans that exceed a certain amount, lenders may require that your loan be secured with collateral. Collateral is an asset you own, such as your house, vehicle or cash. If you cannot repay the loan as agreed, the lender can take your collateral and use it to get some or all of their money back.
If you own a home, you may consider a home equity line of credit to consolidate debt. This is a revolving loan that allows you to make unlimited purchases up to a pre-approved dollar limit. Your payments will vary based on how much you have borrowed. This is dependent on how much equity you have in your home.
Written by Chris O'Shea for SavvyMoney
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