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Debt Consolidation Vs. Personal Loan: Key Differences

debt consolidation vs personal loan
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A notable trend has been observed in Singapore, where an increasing number of younger individuals are seeking assistance with debt management, says financial counselors in Singapore. This upsurge in debt-related inquiries reflects a broader trend of more people approaching social services agencies for help in navigating their financial challenges. 

This scenario underscores the importance of understanding different financial instruments like debt consolidation and personal loans, and how they can be leveraged to manage debt effectively. Debt consolidation loans and personal loans are ultimately one and the same. That said, there are a few important differences between them that are likely to determine which you decide to borrow.

While a debt consolidation loan is specifically designed to help you to save money on high interest debt by combining multiple debts into one single monthly payment, a personal loan can be used for multiple purposes, from debt consolidation to one-off purchases, vacations and more – and this is the primary difference between the two.

Debt consolidation vs Personal Loan

In a nutshell, the primary difference between a debt consolidation loan and a personal loan is that the former has one specific purpose – to help you with consolidating debt – whereas most personal loans offer much more flexibility in terms of what they can and can’t be used for. The following table compares the key differences between the two in brief:


What Is It?

What Can It Be Used For?

Is a Loan Purpose Required?

What Are the Interest Rates Like?

Where Can I Get One?

Debt Consolidation Loan

A loan aimed at people with several existing debts.

It can help you to consolidate debts into a single monthly payment

Yes – you’ll need to specify one

Usually a lower interest rate


Personal Loan

An instalment loan – you’ll borrow money and pay it back later as one monthly payment

Home renovations, medical expenses, one-off purchases, and other expenses

No – you can use a personal loan as you please

Usually a higher interest rate

Banks and licensed money lenders

As you can see, while debt consolidation loans and personal loans have a lot in common, there are also a fair few differences between the two. Let’s explore the key things you need to know about each in a little more detail.

What is Debt Consolidation Loan

A debt consolidation loan is a specific type of personal loan that has one primary purpose – to help you consolidate debt into one single, lower monthly payment. The idea is that people with several separate outstanding debts or current debts might be having trouble keeping on top of their finances, and that having just one monthly payment to keep track of can help you to regain control.

How Does Debt Consolidation Work?

Let’s take a look at this example: Mr. Cheng, a 26 year old male who works a 9-5 job and earns S$6,000 a month, is struggling to keep track of various debt payments with different interest rates and due dates. As such, he opts for a debt consolidation loan. 

The new loan would have its own interest rate (possibly lower than the average of his existing debts) and a fixed repayment period. Instead of multiple payments, Mr. Cheng now makes one monthly payment to the new lender.

Managing one loan is easier than tracking multiple debts with different terms. Additionally, a lower interest rate can reduce the total cost of borrowing over time. Best of all, a structured repayment schedule aids in clear financial planning and eventual debt clearance.

When Do Debt Consolidation Loans Make the Most Sense?

There are several circumstances in which a debt consolidation loan can prove extremely beneficial, such as:

1. You Need to Streamline Your Loan Payments

Having lots of outstanding debts with different payment commitments can be stressful and makes missing payments more likely. If you can consolidate debt into one payment, you can work toward becoming debt free much more quickly.

2. You Want to Pay Less Interest

Debt consolidation works to reduce the interest rate you’ll pay overall, too. A debt consolidation loan may have an interest free period or offer the potential to pay less interest monthly.

3. You Want to Be Debt Free by a Set Date

A debt consolidation loan will usually have a fixed repayment term with an “end date” in sight, helping you to better plan your finances.

young asian women worry about debt

When is a Debt Consolidation Loan a Bad Idea?

Debt consolidation probably isn’t worth considering if you only have a small number of debts that aren’t really worth combining. Likewise, if you’re currently enjoying lower monthly payments than what a debt consolidation loan might offer you, then it probably isn’t worth applying for one – especially when a hard credit inquiry would be involved as part of your loan application.

In an article by CBS News, Luis Andino, founder and CEO of Ditch, a debt management platform advises: “It [debt consolidation] can be a powerful tool when used properly and by the right person, but without addressing the underlying issues, a debt consolidation loan will just free up a revolving trade line and create more debt in the long term,”

Pros of Debt Consolidation

  • Helps you to streamline finances
  • Can speed-up the eventual paying off of your debts
  • Could result in a lower interest rate
  • May reduce your monthly payment burden
  • Could improve your credit score

Cons of Debt Consolidation

  • May result in fees and charges
  • You could potentially pay more interest over time if the loan period drags on
  • There’s always a risk you’ll miss payments

Debt Consolidation Loan Alternatives

Some debt consolidation loan alternatives you might wish to consider, include:

1. Home Equity Line of Credit (HELOC)

Which can help homeowners access lower rates than personal loans by using their home as collateral.

2. Balance Transfer Credit Card

You can use balance transfer credit cards to move balances around and help you pay off debt via borrowing.

3. Debt Management Plan

Which can help you reclaim control over your debts or reach a debt settlement with your creditors.

Consider the case of a 30-year-old Singaporean who found himself in a challenging financial situation. In an effort to manage his family’s outstanding loans and debts, he began borrowing money, leading to a complex cycle of debt. As reported by Channel News Asia, this individual turned to Adullam Life Counselling for assistance. This non-profit organization is dedicated to supporting individuals struggling with debt.

Adullam Life Counselling plays a crucial role in these situations. They act as intermediaries between those seeking help and their legal creditors. Their primary function is to negotiate possible repayment plans, aiming to find a solution that is feasible for the debtor while still satisfying the requirements of the creditors.

What is Personal Loan

Simply put, a personal loan is an instalment loan which allows you to borrow money for spending on any personal finance matters of your choosing. You’ll borrow a pre-agreed loan amount over a set loan tenure period, then repay it in monthly payments over the duration of the loan, plus interest. If you wish, a personal loan can be used for debt consolidation purposes, too.

How Can Personal Loans Boost Your Credit Score?

A personal loan can help to improve your credit report by lowering what’s known as your credit utilization ratio – the measure that credit bureaus and credit unions use when calculating your credit reports. Your credit utilization ratio uses a comparison of your credit card debts, missed payments and on-time transactions to “score” you.

When Financial Attorney Leslie Tayne was interviewed by CNBC, she advised: “If you don’t already have a lot of credit history, a personal loan can help you build a positive payment history, and if you’re using the loan to pay off your credit cards, they can reduce your credit utilization rate. This can reflect positively on your credit report. But if the loan is only adding to your debt then it isn’t likely to help you build credit.”

How Can Personal Loans Hurt Your Credit Score?

When you first take out a personal loan, your bank is likely to carry out what’s known as a “hard credit inquiry” on you and your finances. This kind of check will pull your credit report in full and could result in a temporarily low credit score, though you should be able to build it back up again relatively quickly.

Personal Loan Pros

  • You can borrow money for any purpose you please
  • You can choose your own loan term
  • Your credit utilization will be lowered
  • You can build up a positive payment history
  • You can enjoy fixed repayment terms

Personal Loan Cons

  • A hard check on credit reports is initially required with banks. (Licensed moneylenders, on the other hand, don’t require a high credit score)
  • Interest rates might not always be competitive. (However, for licensed moneylenders, the rates range from 1-4% per month, capped at 4%.) 
  • Missed payments incur late fess and could hurt your credit score
worried hands touch forehead which has many expenses

Alternatives to Using a Personal Loan to Borrow Money

Some alternatives to personal loans that you might wish to consider, include:

Other Types of Loan

If you are borrowing for a specific purchase, such as buying a house or car, another kind of loan might offer you a better or more appropriate deal.

1. Credit Card

Credit cards are probably the most common personal loan alternative. You can borrow money to be paid off at a later date, though interest rates may be high unless you take advantage of an interest free period.

2. Business Loan

If you’re borrowing to spend money on business-related expenses or purchases, a business loan might be a better fit. Both banks and moneylenders offer this type of loan. 

3. Payday Loan

Making ends meet or have a sudden expenses? You can take a “cash advance” or one month’s worth of your monthly salary from licensed moneylenders and conveniently pay on your next payday or within the month.

See Also: Different Types of Loans

Comparative Analysis

Loan TypeBest ForAdvantagesDrawbacks
Debt Consolidation LoanThose with multiple high-interest debts looking to simplify payments and potentially save on interestConsolidates multiple debt payments into onePotentially lowering interest ratesOffers a clear timeline for debt payoffMay come with fees, extending the loan term could mean paying more interest over time
Personal LoanA variety of purposes beyond debt consolidation, such as funding a major purchase, home improvement, or covering unexpected expensesOffers flexibility in usagePotential to lower credit utilizationOpportunity to build credit with consistent repaymentsMight carry higher interest rates compared to some debt consolidation options, hard credit inquiry required for application could initially impact credit score

Frequently Asked Questions (FAQs) About Consolidating Debt and Personal Loans

1. Is it Advisable to Consolidate Debt?

Consolidating debt can be advisable if you’re struggling with multiple debts, especially with high interest rates and varying due dates. It simplifies your payments into one manageable monthly amount, potentially at a lower interest rate, making it easier to track and pay off your debt. However, it’s important to consider your financial situation, as consolidating might not be beneficial if your debts are minimal or if the new consolidated loan terms are not favorable compared to your current debts.

2. What Are the Biggest Downsides of Debt Consolidation Loans?

It’s worth noting that debt consolidation loans do not really address the root cause of your financial woes. What’s more, upfront costs and fees may be involved and there is always a risk that you may miss payments, which could worsen your situation.

3. Does Debt Consolidation Hurt your Credit?

Initially, debt consolidation can hurt your credit score due to the hard credit inquiry required to secure the new loan. This impact is typically short-term, and your credit score can rebound as you make timely payments on the new consolidated loan. In the long run, debt consolidation can potentially improve your credit score by simplifying debt management and reducing the likelihood of missed or late payments.

4. Will Consolidating Debt Help to Improve My Credit History?

A debt consolidation loan can potentially improve your credit score. Keeping up a good payment history can turn a fair credit rating into a good credit score in a relatively short amount of time, as payment history makes up 35% of your FICO score.

A further 30% is made up by reducing outstanding debts – something which being able to consolidate debt with a consolidation loan will easily enable you to do.

5. Can Debt Consolidation Hurt My Credit History?

When you apply for a debt consolidation loan, your lender will carry out a “hard” credit inquiry check with credit bureaus and/or credit unions.

This may temporarily result in a lower credit score in the short-term – but you should be able to rebuild it easily within a month or so by maintaining a positive payment history elsewhere. Missed payments may also damage your credit score.

6. Under What Circumstances Should I Avoid Debt Consolidation?

You should avoid taking out a debt consolidation loan if you fear you won’t be able to afford the loan payments advertised, or that the upfront costs or overall interest rate might be too much for you. With all debt-related decisions, you need to think carefully about the longer-term implications of borrowing, too.

7. Can I Still Access Debt Consolidation Loan Products if I Have a Bad Credit Score?

In a word, yes – there is a very broad market out there with lots of borrowing options available to people with all kinds of credit scores and financial histories, so it’s just a case of shopping around.

8. Is it Wise to Use a Standard Personal Loan to Consolidate Debt?

Personal loans can be used for a wide range of purposes, and debt consolidation is one of them. That said, a specific debt consolidation loan is probably a better fit than a regular personal loan if consolidating debt is your primary objective.

9. Is Bankruptcy a Viable Alternative to a Debt Consolidation Loan?

Declaring yourself bankrupt in a bid to discharge your debts is usually considered a “last resort” option, so you may wish to explore all other debt-reduction avenues available to you before deciding to pursue the bankruptcy route.

How Do I Choose the Best Debt Consolidation Loan?

There are lots of debt consolidation loan options out there, which can make comparing the market quite a challenging task – even if you’re using an easy-to-use loan comparison service like Loan Advisor. We’d recommend looking out for:

1. Competitive Interest Rates

The better interest rate you can secure for your loan, the cheaper your monthly repayments will ultimately be in the long run. In fact, finding a loan with attractive interest rates is one of the best ways to save money in the longer-term.

Banks frequently utilize terms such as ‘flat rate’ and ‘Effective Interest Rate’ (EIR) when outlining the interest rates for their debt consolidation schemes. Take for example HSBC’s Debt Consolidation Plan that offers flat interest rates as low as 4.2% p.a. So if you borrow S$10,000, you will pay S$420 worth of interest per year.

2. Good Repayment Terms

A dependable loan should come with repayment terms that suit you. The best banks and lenders will allow you to choose the term you need.

3. An Appropriate and Affordable Loan Tenure

A short term will reduce the total amount of interest you’ll pay on the loan but will also result in higher monthly payments. Think carefully about which is most important to you, and choose wisely.

4. Coverage for the Full Loan Amount You Need

Affordability is important when it comes to loan amount. You should never overstretch yourself, but also keep in mind that some banks and lenders won’t be willing to let you borrow as much money as others.

Debt Consolidation vs Personal Loan – Which is the Best New Loan Option for You?

Debt consolidation loans and personal loans differ in many ways. At the end of the day, it’s your unique circumstances that will determine which type of loan is right for you. Before applying for either, don’t forget that:

  • Debt consolidation loans are primarily used to help people consolidate debts that were once separate, multiple debts into one easy-to-manage monthly payment.
  • Conversely, while most personal loans can also be used for this purpose, a personal loan has several other uses and more flexibility.
  • While a debt consolidation loan will usually come with a lower interest rate, these types of loans lack the flexibility afforded by personal loans, and you will need to specify a purpose for the loan at the point of borrowing.

Regardless of the type of loan you need, it’s always a great idea to compare the market to find the best possible deal before applying with the first provider you come across. Loan Advisor can help you compare up to three loan quotes from trusted licensed moneylenders, entirely for free! 

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