If you have accumulated several forms of high-interest debt, it can feel like you are a prisoner to the debts you owe. Fortunately, financing options like debt consolidation loans can set you free and help you regain control over your finances. When deciding which option is right for you, it is normal to ask yourself, What’s the difference between a debt consolidation loan and a personal loan? We are here to help!
Camino Federal Credit Union has served Montebello with debt management products and guidance tailored to each member’s needs and situation since 1941. We partner with each member to help them overcome their debt and achieve financial success, whatever that looks like for them.
What is the Difference Between a Debt Consolidation Loan and a Personal Loan?
To understand the difference between these two types of loans, we will start by diving into both to illustrate some key differences and characteristics. So, without further ado, let’s get into debt consolidation loans vs. personal loans.
What is a Debt Consolidation Loan?
Debt consolidation is, essentially, using a personal loan to reorganize and roll several high-interest debts you have accumulated over time into a larger debt.
These loans are designed specifically to help borrowers consolidate debts, so they have unique characteristics. If you decide to take out a loan for debt consolidation, you can figure out how much you need by summing up the outstanding debts you have.
This total will be the amount you could borrow to pay off one or more other debts. The debts you can consolidate can vary and include:
- Credit card balances
- Unexpected medical bills
- An outstanding balance on a car loan
- An outstanding balance on personal loans
By consolidating your debt, you effectively refinance and combine your debts into one fixed payment as a replacement for paying several separate monthly loan payments at different amounts with a clear repayment schedule to simplify your finances.
One way to think about the difference between a debt consolidation loan and a personal loan is, essentially, that a debt consolidation loan is a type of personal loan and is one way in which you can use it.
Debt consolidation loans typically offer great rates and terms and could be an option to simplify payments, help pay down debt faster, and potentially improve your credit score.
What is a Personal Loan?
A personal loan provides additional cash flow by allowing you to borrow a lump sum of money upfront and repay those funds in monthly installments with interest based on loan terms. You can use a personal loan for virtually any purpose, including:
- Holiday spending
- Weddings, honeymoons
- Dream vacations
- Paying unexpected medical expenses
- Home or auto repairs
- Debt consolidation
Generally speaking, there are two types of personal loans: unsecured and secured. Unsecured personal loans are great for debt consolidation. With unsecured personal loans, you do not have to put anything up as collateral. Instead, the lender decides to lend to you based on your credit score, income, occupation, and current debt.
Secured personal loans, on the other hand, require collateral, though collateral could be something like money in your bank account. If you can’t pay the loan, the lender keeps the collateral. Secured personal loans could be easy to obtain and available to those with poor credit.
Still when it comes to debt consolidation, we advise inquiring about debt consolidation loans specifically. Camino personal loans for debt consolidation are specifically designed to help you pay off a lump sum of debt and offer better terms and rates for that specific purpose.
What Are the Benefits of Using Personal Loan for Debt Consolidation?
Consolidating your debt can be beneficial for debt management and make it easier to handle in the long run. Based on your situation, it may be better to consolidate some debts compared to others when it comes to personal, student, or business loans.
You can benefit from a debt consolidation loan in several ways to pave the way to a bright financial future. Debt consolidation can help you:
- Enjoy low, competitive fixed rates: As a not-for-profit credit union, we can offer comparably great lower rates. You’ll pay a fixed rate on your loan for the term of your loan, meaning your monthly payments will be predictable. It doesn’t matter if interest rates increase; you only pay the agreed rate that’s locked in. As a result, budgeting and financial planning could be easier.
- Make fewer payments per month: The convenience of only having one payment for debt consolidation can give you peace of mind. When you have several different payments to make each month, it is easy to let one slip by, and simplifying your finances is a great way to prevent that from happening.
- Save money with lower interest: When you consolidate debt, you usually receive a lower interest rate. By paying less interest and lowering your payment on your high-interest debt, you can save money in interest alone, which comes out to hundreds or thousands of dollars over your loan term.
- Make lower monthly payments: Generally speaking, when you consolidate your debt, you can decrease the amount of your monthly payments, enabling you to pay off your debt faster and budget more effectively. Your monthly payment is determined by your loan amount, loan term, and rate, usually from 24 to 60 months. If you choose a longer term, you’ll have lower payments, which may free up your money for other expenses.
- Increase your available credit: If your debt primarily comes from credit cards, once you have paid off those balances, you will have more available credit, which will also boost your credit score by reducing your utilization rate.
How Do I Know if I Need to Consolidate My Loans?
Several situations exist in which consolidating your loans is advisable. Debt consolidation could be a great idea if you:
- Have a lot of outstanding loans and debt with high interest that would cost you more time and money in the long run.
- Want to pay off your debt quicker with fixed rates and a predetermined repayment schedule that will tell you exactly when you’ll be done paying down the debt.
- Can find a competitive interest rate for a debt consolidation loan that’s lower than what you are paying now to minimize monthly payments.
- Have a plan to manage your finances and avoid falling back into the financial habits that put you in debt in the first place.
- Have a few different outstanding loans and combining payments into a single monthly payment would streamline your finances.
If you relate to any of these situations, taking out a debt consolidation loan could be a great option to put you on the fast track to regaining your financial confidence.
What Types of Personal and Debt Consolidation Loans Does Camino Offer?
At Camino, we offer two types of personal loans you can use for consolidating debt: a share-secured loan and a signature loan.
A share-secured loan is a secured loan that uses your deposits at Camino as collateral, which allows us to offer you a lower loan rate. A signature loan is an unsecured loan that doesn’t require collateral, so the terms are more limited.
Apply for a Debt Consolidation Loan Today to Put Your Debt Behind You!
So, now you understand the difference between a debt consolidation loan and a personal loan. Do you want to pay off your debt faster, save money while you do it, and put yourself on the path to greater financial success? Debt consolidation could be a great option.
Visit our Debt Consolidation Loans page to learn more about this program and apply for financing to put your debt behind you and build a bright financial future.