Debt Consolidation vs Personal Loan: Which Lowers Your Cost?

Why it matters

Choosing between debt consolidation and a personal loan comes down to total cost, not just monthly payment. A consolidation plan can lower the amount you pay each month and reduce interest if you replace high‑APR credit cards with a lower‑rate loan. But origination fees, a longer term, or variable‑rate products can erase those savings.

How each option typically works

• Debt consolidation: A strategy that merges multiple balances (credit cards, medical bills, etc.) into one account or plan. That plan can be a balance‑transfer credit card, a home‑equity product, or a personal loan. The goal is lower APR, fewer payments, or both.

• Personal loan (used for consolidation): An unsecured, fixed‑amount loan repaid over a set term with fixed monthly payments. Lenders price these by creditworthiness; rates in 2025 typically range widely (single digits for prime borrowers to mid‑teens for subprime applicants). Always compare APR, term, and fees.

Realistic cost comparison (example)

Imagine $15,000 in credit card debt at 18% APR, paid over 48 months vs a $15,000 personal loan at 10% APR for 48 months. Rough totals:

• Credit cards (18%): monthly ≈ $438; total interest ≈ $5,024.
• Personal loan (10%): monthly ≈ $379; total interest ≈ $3,192.
• Estimated savings: ≈ $1,832 in interest and ≈ $59 lower per month.

Note: These figures are illustrative. If the personal loan includes a 1% origination fee ($150), add that to the loan cost. If you extend the term to lower the monthly payment, total interest can increase even if the APR is lower.

How to decide — steps I use with clients

1. Gather balances, rates, and minimum payments for every debt.
2. Get real loan offers including APR, term, and fees. Prequalification tools give soft‑pull rate estimates from many lenders (no hard inquiry).
3. Compare total cost: compute monthly payment and total interest (include fees) for each option and for keeping current payments.
4. Check non‑cost factors: impact on credit utilization (closing paid cards can raise utilization if balances remain), loss of student‑loan protections if you refinance federal loans, and how predictable you need payments to be.
5. Choose the option that minimizes total cost while fitting your repayment discipline.

Common savings pitfalls

• Origination fees and prepayment penalties that eat into savings.
• Extending the repayment term to cut monthly payments can raise lifetime interest costs.
• Refinancing federal student loans into a private personal loan removes federal protections and repayment plans (review before consolidating federal student debt).

Credit impact and non‑price benefits

A successful consolidation can improve credit by lowering utilization and simplifying payments, but opening and closing accounts or a hard credit inquiry may cause small, short‑term score changes. Consistent on‑time payments after consolidation drive score recovery.

When consolidation with a personal loan makes sense

• You have high‑APR unsecured debt (credit cards) and can qualify for a significantly lower APR on a personal loan.
• You need predictable, fixed monthly payments.
• You plan to avoid new high‑interest borrowing after consolidation.

Alternatives to consider

• Balance‑transfer credit cards (often 0% intro APR) for disciplined borrowers who can pay the balance before the promo ends. See when a balance transfer beats a loan in our article on When to Use a Debt Consolidation Loan vs a Credit Card Balance Transfer.
• Home equity loans or HELOCs for lower rates but higher risk (home as collateral). Compare options in Using HELOCs Safely for Home Improvements and Debt Consolidation.

Further reading on this site

• When a Debt Consolidation Loan Makes Sense: Criteria and Mistakes to Avoid
• Personal Loan Debt Consolidation: Pros, Cons, and Process

Quick FAQs

• Can I consolidate federal student loans with a personal loan? Not without losing federal benefits and repayment options; generally not recommended unless you understand the tradeoffs.
• Will consolidation hurt my credit? Short‑term effects can occur, but disciplined payments after consolidation usually improve credit over time.

Author’s note and disclaimer

In my 15 years advising borrowers, I’ve seen the largest savings come from lower APRs without adding years to repayment. This article is educational and not individualized financial advice. For personalized guidance, consult a certified financial planner or your creditor.

Sources

• Consumer Financial Protection Bureau: guidance on debt consolidation and balance transfers (cfpb.gov)
• ConsumerFinance.gov — resources on personal loans and shopping for credit (consumerfinance.gov)