Debt consolidation loans vs. Personal loans

Loans can help you cover expenses, make a big purchase and even consolidate existing debt — but what type of loan makes the most sense and when? Let’s look at the uses and benefits of debt consolidation loans and personal loans, as well as some ways to decide which type of loan is right for you.

Debt consolidation loans

A debt consolidation loan combines two or more debts into one loan. It can allow you to simplify payments and manage your debt more effectively.

How do debt consolidation loans work?

A debt consolidation loan is a type of personal loan — just one you use to pay off multiple debts. It rolls several unsecured debts — such as credit card bills or personal loans — into a single loan. If you apply for a debt consolidation loan and are approved, the lender deposits the funds into your account or sends them directly to your creditors.

How does this look in practice? If you’re making monthly payments on three credit cards with outstanding balances, you can use the funds from a debt consolidation loan to pay off all three balances. The three-monthly payments are replaced with just one payment on your debt consolidation loan.

When should you consider a debt consolidation loan?

It can make sense to get a debt consolidation loan if:

  • You find a lower interest rate: Finding a debt consolidation loan with a lower interest rate than that of your current debts can save you money over the loan term. Keep in mind though, that some debt consolidation loans could have longer term lengths than your outstanding debt. This could mean you’ll pay more interest in the long run, even if the loan’s interest rate makes your current debt more manageable.
  • Your credit card interest rate is rising: Debt consolidation loans typically have fixed interest rates. Provided you don’t default on payments, your monthly payment will remain consistent for the loan term.

Alternatives to debt consolidation loans

Loans aren’t the only way to manage debt. Other options include balance transfer credit cards and debt repayment strategies.

Balance transfer credit cards

A balance transfer lets you move an outstanding credit card or loan balance to a new credit card. While cardholders may pay a fee to transfer balances, they can usually get a low introductory rate for a specified period. The low interest rate may last anywhere from a few months to over a year, and cardholders can use this opportunity to pay down debt. Any unpaid balance at the end of the offer period incurs the full interest rate. 

Debt snowball method

The debt snowball method focuses on reducing debt by tackling smaller and more manageable debts first. To start, list all your debts from smallest to largest. Continue to make the minimum payments on the larger debts while using extra money to pay off the smallest debt faster. Each time a debt is repaid, you follow the same strategy with the next-smallest debt, rolling the money you were using to pay the smallest debt into payments.

Debt avalanche method

The debt avalanche method prioritizes paying off high-interest debt. Start by listing all your debts from highest to lowest interest rate. You make minimum payments on all debts while putting any extra money toward the highest-interest debt to pay it off faster. Once you've cleared the highest-interest balance, move on to the next-highest and follow the same strategy. This method can help you save on interest in the long run.

Personal loans

The term “personal loan” applies to a broader category of loans you can use for a wide range of purposes, including bigger purchases like car repairs, home renovations or moving costs. You can also use a personal loan to consolidate debt, even if it is not explicitly called a debt consolidation loan.

How do personal loans work?

Unsecured personal loans are available through most banks, credit unions and online lenders. Rates, amounts and terms depend on the lender's policies as well as the borrower's creditworthiness, income, debt-to-income ratio and other factors.

Most lenders now have an online application process. You may need to fill out a form and provide proof of your income and identity. After you fill in the necessary information, the lender performs a hard credit inquiry to learn about your credit history and current debts. They use this information to determine your loan term, rate and other loan details.

If approved, you'll receive the funds by check or direct deposit. Borrowers usually must start making monthly payments as soon as the loan is disbursed.

When should you consider a personal loan?

There are few limits on what personal loans can be used for, but they are typically best for situations where you need funds quickly to finance a big expense. Here are some situations in which a personal loan might make sense:

  • You're looking for a flexible loan: You can use the funds from a personal loan for whatever you want, including more than one expense. For example, part of your loan can go toward fixing your roof and the rest can go toward paying off a credit card balance.
  • You need funds quickly: The turnaround time on personal loans can be short, especially if you apply online. Citi account holders can get a response to their online Citi personal loan application in as little as 60 seconds. Once approved, they can have the funds deposited into their account on the same day. Non-Citi accountholders can get funds deposited within just two days of approval.

Alternatives to personal loans

Although you can use a personal loan for just about anything, they might not be the best option for every situation. Here are some alternatives:

Credit cards

Credit cards can be a convenient way to make everyday purchases. You can use credit cards for larger expenses like car repairs, but you’ll be charged interest on outstanding balances after your payment due date (even if you've made the minimum payment). On-time payments can help you build credit and avoid accruing interest.

Personal lines of credit

Similar to a credit card, a personal line of credit (LOC) is a revolving line of credit that lets you withdraw funds up to a certain amount. LOCs can make sense if you need ongoing access to funds or are unsure how much something — for example, a kitchen renovation — will cost.

Choosing the right loan

The right loan for you depends on your financial needs and circumstances. If your goal is to combine multiple debts, getting a debt consolidation loan might make sense. However, if you need funds for other reasons, such as to pay for a wedding or home repairs, then a personal loan may be the better option. Remember to compare different lenders, rates and terms to make an informed decision.

Citi offers personal loans to both existing Citi customers and new Citi customers that meet specific eligibility criteria, including an established credit and income history along with additional factors determined by Citi. If you think you could benefit from a Citi Personal Loan, apply online today.

Disclosure: This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.

Additional Resources

  • Start your personal loan application now!

  • Learn how FICO® Scores are determined, why they matter and more.

  • Review financial terms & definitions to help you better understand credit & finances.