Debt consolidation vs. personal loan: A guide

Debt can hold you back from creating the life of your dreams, but it doesn’t always have to be that way. There are many roads to getting out of debt, and among them, debt consolidation is one of the most popular avenues. 

Debt consolidation terms can be a bit misleading, however. Many people wonder what the difference is between debt consolidation vs. a personal loan, for example, when they’re the exact same thing, more often than not. That’s not the case with every lender, though, so let’s dig into it a bit further.  

What is a debt consolidation loan?

A “debt consolidation loan” is a catch-all term for different tools you can use for debt consolidation — i.e., paying off multiple debts with a high interest rate or using new financing that carries a lower interest rate. 

A common example is taking out a personal loan to pay off credit card debt. At the start of 2025, the average credit card interest rate was 22%, but the average personal loan rate was only 12%. If you can pay off the same debt at a 10% lower interest rate, you can save money while getting out of debt sooner. 

While personal loans are some of the most widely used tools for debt consolidation, they’re not your only option. You can also use other types of credit as a debt consolidation loan, too, like 401(k) loans or home equity lines of credit (HELOCs), which we’ll cover more in-depth later in the article.

What is a personal loan?

A personal loan is a type of unsecured debt that offers flexible funding for nearly anything, including debt consolidation. In fact, 48% of applicants seeking personal loans with the online lender LendingTree at the beginning of 2025 planned to use them for just this purpose: to consolidate debt.

You may see some lenders marketing a separate “debt consolidation loan,” but often, it’s just a different type of personal loan that they’re rebranding for people who might be searching for it. Often, it’s the exact same personal loan that you’d get for anything else. 

Some lenders, however, might offer extra perks with a debt consolidation loan, such as easier underwriting, lower rates, and/or sending the loan proceeds directly to your old creditors to save you a step in doing it yourself. Generally speaking, credit unions offer the lowest rates on personal loans compared to other online lenders and banks. 

Debt consolidation loan vs. personal loan

You can think of debt consolidation loans vs. personal loans as different circles on a Venn diagram. Not all debt consolidation loans are personal loans, but many are. Similarly, not all personal loans are used for debt consolidation, but that’s often the case.  

Alternatives

If you’re looking for other options to consolidate existing debt into a single loan, here are a few tools that might work better, depending on your financial situation:

Debt management plan

Nonprofit credit counseling agencies offer free financial assistance for anyone looking for help in managing debt. They offer low-cost debt management plans that help you repay your loans and credit cards within a three- to five-year time span by negotiating directly with your lenders to reduce your interest rates and late fees. Debt management plans also don’t rely on your FICO score, making them a good choice if you have bad credit. 

Balance transfer credit card

Some credit cards allow you to pay off transferred debt at 0% interest for a certain number of months. They may charge a balance transfer fee for this, ranging from 3% to 5%. If you think you can pay off your transferred debt in full before that 0% introductory period ends, it can be a good way to make quick progress on your debt.

Home equity loan and HELOC

Home equity loans and lines of credit offer much lower interest rates than personal loans, which can make your debt consolidation journey go much faster. In particular, home equity loans have lower fixed interest rates, which can add payment stability to your budget. HELOCs provide an interest-only draw period, which can keep costs low initially. You’ll then make interest-plus-principal payments during the repayment period. 

However, be aware that if you default, the lender could foreclose on your home. 

Home equity investment (HEI)

A home equity investment offers flexible lump-sum funding just like a home equity loan, which you can use to consolidate debt. It doesn’t require any monthly payments, however, making it a good choice if you’re undergoing temporary income fluctuations. The funds are typically due at the end of a 30-year term in another lump sum payment, plus a small percentage of your home’s growth in equity. There are no income requirements, and homeowners can qualify with a credit score above 500.

Cash-out mortgage refinance

A cash-out refinance allows you to pull equity from your home in the form of a lump sum, which you can use to pay down debt. You’ll also refinance your home in the process, so that you only have a single loan to work with. It can be a good option if you’d be able to qualify for lower rates than you’re currently paying on your mortgage. 

401(k) loan

Taking out a 401(k) loan against your retirement isn’t ideal because it can reduce your investment growth, and you may have to pay it back immediately upon leaving your employer. If you have a stable and secure job, however, it can be a good option because it doesn’t rely on your credit score, and monthly payments can be taken out of your paycheck. 

Frequently asked questions

Is it worth it to get a personal loan to pay off debt?

In many cases, yes. A personal loan can help you make quicker progress in paying off higher-interest debt, such as from credit cards. Financial experts don’t recommend them if you have a credit card spending problem, however, since it can be tempting to run up a credit card balance again. 

Is it better to apply for a personal loan or debt consolidation loan?

You can use a personal loan to consolidate debt, along with many other types of loans or home equity products. They’re a good choice because they offer quick funding that isn’t tied to your home. Some lenders offer special rates and looser underwriting on personal loans that you use specifically for debt consolidation. 

Can you use equity to pay off debt?

Yes. If you have sufficient equity in your home and meet other lending requirements, pulling equity from your home to pay off higher-interest debt can help you save a lot of money and get out of debt even faster. Home equity loans, HELOCs, home equity investments (HEIs), and cash-out refinance loans are all excellent options to investigate.  

Final thoughts

Many people looking to consolidate debt have bad credit simply because they’re carrying high levels of debt. If you’re not able to qualify for a personal loan, using home equity financing options may work better for you. In other cases, you might choose something like a debt management plan from a credit counseling agency, which doesn’t rely on credit at all.