What's the difference between a personal loan and a debt consolidation loan?

What's the difference between a personal loan and a debt consolidation loan?

Whether you need extra cash to cover an unexpected car repair or you're tired of juggling multiple credit card payments every month, a loan could help. You might be considering a personal loan or a debt consolidation loan and wondering which is right for you. All debt consolidation loans are personal loans, but not all personal loans are debt consolidation loans. The difference comes down to how you use the funds. In this guide, OneMainFinancial explains what a personal loan is and what a debt consolidation loan is, to help you make the best choice for your financial needs.

What is a personal loan?

A personal loan allows you to borrow a lump sum of money from a lender, bank or credit union and repay it - with interest - in fixed monthly payments until it's paid off. You can use a personal loan for a variety of purposes, including emergency expenses, home improvement, auto repairs and more.

Personal loans can be secured, meaning they're backed by collateral such as a vehicle, or unsecured, which don't require collateral. Secured loans may offer a lower interest rate, especially if you have less-than-perfect credit, because the lender can take your collateral if you don't repay according to the terms of your loan agreement. Unsecured loans typically rely more heavily on your creditworthiness for approval and, depending on your financial situation, may have a higher interest rate than secured loans.

Often, personal loans have fixed interest rates and predictable monthly payments, so you know exactly what to expect each month.

What is a debt consolidation loan?

A debt consolidation loan is a personal loan used to combine multiple debts into a single, more manageable monthly payment. The loan is for a lump sum that you can use to repay existing debts. A debt consolidation loan can be secured or unsecured, depending on your needs and the options your lender offers.

If you feel buried under credit card balances, bills and loans, consider a debt consolidation loan to pay them all off at once and repay the new loan in fixed monthly payments, ideally with a lower interest rate than the rates of your existing debts. If you're approved for a debt consolidation loan, sometimes the lender will pay off your existing debts directly. Other times, they'll give you a lump sum, and you'll pay the creditors yourself. In either case, you'll then repay the debt consolidation loan to your new lender.

Remember to consider the pros and cons to help you decide if debt consolidation is a good idea for your budget and goals.

Personal loan vs. debt consolidation loan: What's the difference?

When comparing personal loans and debt consolidation loans, the difference is in how you plan to use the funds. A personal loan is a broad category of loans that includes debt consolidation loans. Despite the name, the money from a personal loan can be used in many ways, from covering vacation expenses to financing a wedding.

What to consider before taking out a new loan

Keep this information top of mind before you move forward with applying for any loan to make sure it's best suited to your situation.

• Check for prequalified offers: Before you apply for a loan, you can check for prequalified offers. Prequalifying lets you consider your options and budget before you commit to a loan.
• Understand hard inquiries: Applying for any new loan triggers a hard credit inquiry, which could cause a slight dip in your credit score. But making your monthly payments on time may ultimately improve your credit score over time.
• Compare loan offers: Offers vary widely between loan types and lenders, so it's important to make sure that the monthly payment, repayment term, interest rate and overall borrowing cost for any loan align with your budget.
• Review the loan terms: Always read the loan terms thoroughly and ask questions if anything seems unclear. Before agreeing to a loan, it's helpful to understand the loan fees, how interest is calculated and the annual percentage rate (APR) - the annual cost of borrowing.

Find the best fit for your financial goals

A personal loan may be helpful for a wide range of expenses. If you're specifically looking for a way to make your debt more manageable, a debt consolidation loan may give you some breathing room. Take time to research your options, compare terms, and find a payment that fits your budget. If you're approved, focus on making on-time payments every month, and avoid taking on new debt.

This story was produced by OneMain Financial and reviewed and distributed by Stacker.

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