Search
  1. Home
  2. Loans
  3. Debt Consolidation Loan vs Personal Loan: How to Choose
Published February 9, 2023

Debt Consolidation Loan vs Personal Loan: How to Choose

A debt consolidation loan and personal loan have many similarities, but may differ on qualification requirements, collateral requirements, interest rate and loan limit.

When it comes to managing debt, less is more. Which is to say, making a single on-time payment each month is often easier than trying to keep track of many different payments. And depending on the interest rates you’re being charged, it may be cheaper too.

The process through which several small debts become one larger debt is called consolidation, and there are a couple of different ways you can achieve it. Debt consolidation loans and personal loans are a couple of popular methods.

What is a debt consolidation loan?

A debt consolidation loan is a type of personal loan that has been specifically designed to combine various debts into one. 

Typically, debt consolidation loans are used when you have multiple, high-interest, unsecured debts such as credit card debt

Once approved for a debt consolidation loan, your lender will provide you with the money to pay off all your other debts so you are left with a single, larger loan. 

The main draw of a debt consolidation loan is that it typically offers lower interest rates than credit cards or other lines of credit. 

Depending on your personal financial situation, you may require collateral (ie: your home or car) to be approved for a debt consolidation loan, however.  

What is a personal loan?

A personal loan allows you to borrow a fixed amount in the form of a lump sum, but it has no predetermined use. Personal loans can be secured or unsecured.

You can use the money obtained from a personal loan for pretty much anything you want. Common uses for a personal loan include home repairs, buying a car, or financing a big purchase, like a wedding.

Like a debt consolidation loan, personal loans can also be used to pay off other debts, though the limits and shorter terms offered by personal loans might be a problem if you’re trying to manage more than $50,000 of debt.

Debt consolidation loans vs personal loans

Debt consolidation loanPersonal loan
TypesSecured
Unsecured
Secured
Unsecured
Common usesTo pay off high-interest debts.Home renovations.
High-dollar purchase (car, appliances, etc).
Expensive life events (wedding or funeral).
To pay off high-interest debts.
Where to getBanks
Credit unions
Private or alternative lenders
Banks
Credit unions
Private or alternative lenders
Typical loan limit$50,000 to 100,000, depending on lenderUp to $50,000, depending on lender
Typical interest rateRanges from 6% to 32.00% APR, depending on credit profile.Average rate is around 10%, depending on credit profile.
Typical qualification requirements
  • Be a resident of Canada.

  • Be the age of majority.

  • Have a bank account.

  • Have collateral.

  • Meet lender's minimum credit score.


  • Be a resident of Canada.

  • Be the age of majority.

  • Have a bank account.

  • Have proof of stable income or collateral.

  • Meet lender's minimum credit score.

Debt consolidation loan vs personal loan: Which is right for you?

A debt consolidation loan is a type of personal loan, but not all personal loans are debt consolidation loans. Debt consolidation loans share many characteristics, but may vary on qualification requirements, collateral requirements, interest rate and loan limit.

The loan option that’s right for you will depend on what you’re hoping to accomplish with the loan, and your credit profile. For example:

  • If you’re looking to finance a purchase that’s under $50,000 and you have a good credit score, a personal loan may be the right choice.
  • If you’re looking to consolidate a large amount of high-interest debt and you have a lower credit score, a debt consolidation loan might be the right choice.

While shopping around be sure to ask potential lenders the following questions: 

  • What is the best interest rate you can offer me?
  • What additional fees do you charge?
  • What will the monthly payments be?
  • How long will I have to pay this loan back?
  • Will I face penalties if I repay the loan early?

Whatever method you use to consolidate your debt, be sure to compare interest rates and fees from several lenders. The interest rate you are paying on your single loan should be less than the interest rates of the debts you are consolidating. If not, you may not actually save money by consolidating.

However, this can be difficult as oftentimes those who need to consolidate their debt have been struggling for a while and have low credit scores. A lower score can make it harder to get approved for competitive interest rates.

Alternative financing options to consider

If you do not qualify for a personal loan or a debt consolidation loan there are a couple of other options you can consider. If you haven’t yet, you can go to an alternative lender. However, these lenders typically have higher interest rates which may defeat the purpose of consolidating your debt. 

Other options include:

About the Author

Hannah Logan

Hannah Logan is a writer and blogger who specializes in personal finance and travel. You can follow her personal travel blog EatSleepBreatheTravel.com or find her on Instagram @hannahlogan21.

Read More
DIVE EVEN DEEPER
Types of Loans Available in Canada

Types of Loans Available in Canada

Common loan types include personal loans, home loans and student loans. Knowing how these types of loans work in Canada can help you achieve your financial goals.

How to Get a Better Credit Score

How to Get a Better Credit Score

Did you know that having a good credit score is important if you ever need a loan, like a mortgage or a car loan? Lenders will look at your credit score as a quick reference to determine how creditworthy you are and what interest rate you should pay. Since this number can significantly affect your […]

Canada Post MyMoney Loan Goes National: What to Know Before You Borrow

Canada Post MyMoney Loan Goes National: What to Know Before You Borrow

The MyMoney Loan, Canada Post’s personal loan offering, is now available to borrowers across the country. Here’s how to decide if it’s right for you.

How Car Loans Work in Canada

How Car Loans Work in Canada

A car loan is a way to purchase a new or used vehicle when you lack the cash to buy it outright. Car loans must be paid back with interest over an agreed-upon number of months.

Back To Top