Debt Consolidation vs Personal Loan

Debt Consolidation vs. Personal Loan: How Do They Differ?

In a 2022 report from Chanel News Asia, some credit companies reveal that the applications for personal loans in Singapore have doubled compared to the previous year. 

The high cost of living, the rising inflation, and the lingering effects of the pandemic are reasons why many take out loans in Singapore. These same factors also increased the use of credit card facilities for daily expenses. But while these loans are essential to meeting cash shortfalls, they can also put you in an endless cycle of debt.

If you’re in a tight situation or have too many debts to handle, you might be looking between a debt consolidation loan and a personal loan. In essence, these two options basically work the same. Specialized debt consolidation loans provided by banks, and a personal loan from another authorized lending company could be the next best thing to consider. 

But how do you clear the blurry lines between debt consolidation and personal loans? Read through to understand how these two financial tools differ and when to use them.

A Quick View: Personal Loan Vs. Debt Consolidation 

Debt consolidation loans are simply a type of personal loan used to combine multiple loans into a single loan to lower interests. While a personal loan is something that can be used for a variety of personal needs.

Personal Loan Debt Consolidation Loan
Where to Avail? Banks and other financial institutions Banks offer personal loans specialized for debt consolidation
Purpose Can be used for various purposes, including debt consolidation Specifically for consolidating your existing debts



What is a Debt Consolidation Loan?

A debt consolidation loan is simply a personal loan that is used for the specific purpose of combining existing debts into one loan. These debts can be in any form and are then made manageable with one monthly payment. 

How Debt Consolidation Loan Works?

Debt consolidation loans are ideal if you have multiple high-interest debts. By consolidating debt into a single loan, keeping track of your monthly payment will become easier. Moreover, this move will also result in a lower interest rate compared to the previous individual interest rates of your loans. 

Here’s how it works:

  • Apply for a personal loan that will cover all your existing debts. 
  • Once approved, use the funds to pay off your debts, prioritizing those with high-interest rates. 
  • After that, you will make a single monthly payment instead of many to different financial institutions. 
  • Pay off the new loan over the agreed loan term and conditions to avoid penalties and take full advantage of the benefits.

With this financial strategy, you may save money over the long run and have a more definite period of clearing off multiple debts. 

What’s Good About Debt Consolidation Loan?

Debt consolidation loans are unsecured loans that are designed to help you eliminate high-interest debts. It is also ideal for those with multiple credit card balances. Other benefits include:

  • Lower interest rate 

Compared to the combined interest rates on all your existing outstanding debts, with a debt consolidation loan, you will be paying a lower interest rate on a single loan. As such you can end up saving a few hundreds to thousands of dollars depending on how much you owe. 

You may also use a loan calculator to get an estimate of how much interest you get to pay over this new loan.

  • Simplifies your finances 

A debt consolidation loan help you manage your budget and finances easier as you will only be paying for one loan instead of many. It will also reduce the pressure of meeting multiple due dates and missing out on a payment. 

  • Improves your credit score.  

Using a debt consolidation loan to pay multiple debts is likely to improve your credit score in the long run. By reducing the amount you owe, your credit utilization ratio improves and this reduction positively affects your credit score.

  • Better repayment terms.

With a debt consolidation loan, you can start anew over a longer repayment period with lower monthly installments. 

  • Accelerates your debt repayment.

With lower interest rates, you’ll also be able to pay your debts a little faster. This accelerates the repayment because most of your payment goes to the principal loan rather than the interest. It is also best to look for a financial institutions that do not charge a prepayment fee in case you plan to repay your loan earlier.

What Are the Risks of Getting a Debt Consolidation Loan?

However, like other financial tools, debt consolidation loans may not be right for anyone. Here are some things you should also consider:

  • It does not guarantee one to be debt-free. 

Carefully assess why you got into debt in the first place. If overspending and lack of financial discipline are some of the reasons, getting a debt consolidation loan won’t probably help end the cycle.

  • It may come with upfront fees and prepayment penalty fees.

Some financial institutions may also charge other fees, such as processing and origination fees. Others may also charge prepayment fees. It would be best to verify this with your financial institutions if you plan to repay the loan early. 

  • Higher interest rates. 

Interest rates will also vary depending on the financial institution and the borrower’s credit score and credit report. Shop across financial institutions to get the best rate.

  • Committing to monthly repayments. 

A debt consolidation loan will appear as a new debt on your credit report. Avoid missing your monthly repayments to avoid penalty charges and damaging your credit score. 

When Does Debt Consolidation Make Sense?

Getting a debt consolidation loan is not always a good idea. But it would make sense to take the plunge if:

  • You can secure a lower interest rate than what you are currently paying. 

Debt consolidation loans are ideal if you can borrow money that is enough to cover all your debt at a lower interest rate.

  • You have good financial habits and disciple. 

Committing to a debt consolidation loan takes financial discipline and diligence to emerge successfully.

Are There Alternatives to Debt Consolidation Loan?

Debt consolidation is an ideal solution to gaining control over debt, but there are other alternatives you may want to consider. Other solutions include:

1. Balance Transfer Credit Cards

A balance transfer can be considered another way of consolidating debt, specifically for credit card debt. Banks may offer you a balance transfer credit card wherein you decide how and when to pay your balances. This tool can be ideal with the commitment that you will not add more to your existing credit card balances.

2. Refinancing

Another way to pay off debt is through refinancing, wherein you pay one loan with another loan with better terms. However, unlike a debt consolidation loan which can cover more than one loan, refinancing covers only a single loan. Thus, you may need more than one refinancing loan for different creditors.

debt collection stamp red

What is a Personal Loan?

Personal loans are funds you can use for almost anything, from daily expenses to significant expenses like weddings, medical bills, home renovations, and more. You can also use it to consolidate debt and pay off high-interest debts. 

How Personal Loan Works?

Getting a personal loan is a quick way to access funds. These are unsecured loans and may only take a day or two to get approved.  As mentioned, borrowers can also use a personal loan for debt consolidation. 

What makes it confusing to some is that some financial institutions advertise their personal loan offerings as specialized debt consolidation loans to attract borrowers. However, there is actually no difference, and it is up to the borrower to use and allocate the funds accordingly.

What’s Good About Personal Loans?

Personal loans are easy to apply for, and you can easily access them through banks, and other financial institutions. It also comes with many benefits, such as:

  • Flexibility

Personal loans are one of the most flexible financial products in Singapore. Unlike other loans, there is no limit to how the borrower wants to use the funds.

  • Fast Processing

Unlike traditional and secured loans, personal loans take less than 24 hours to get approved once you’ve submitted all the requirements. You may also get your funds disbursed on the same day. However, with banks, public holidays and weekends may affect the speed of disbursement.

  • Fixed Interest Rates

Unlike other lines of credit, personal loans come with a fixed interest rate and allow you to pay in equal monthly payments. As such, you will have a set and predictable monthly payment to look forward to.

What are the Risks of Taking Out a Personal Loan?

Personal loans don’t come without risks. Whatever your financial reason could be, there are a few things to watch out for before taking out a personal loan.

  • Potential damage to your credit score

Inquiring for a personal from multiple financial institutions may result to a hard inquiry and you may risk losing a few points to your credit score.

  • May result to high over-all debt

Personal loans, when used for loan consolidation, may put you in a higher risk of getting more debt. This may happen with lack of financial planning and if you don’t commit to paying your dues diligently.

  • Higher Interest Rates

Unlike secured loans, personal loan are riskier on the part of the financial institution. Thus, some financial institutions may impose a higher interest rate over a short repayment period. 

When to Use a Personal Loan?

Personal loans are a great option if you have other concerns aside from debt consolidation. You can use it in whatever way that will help you with your finances without carrying too much risk, such as secured loans

Other Important Things to Know

1. Does Debt Consolidation include Personal Loans?

Yes. Debt consolidation covers unsecured debt, including personal loans, credit card balances, and other unsecured lines of credit.

2. Will my Credit Score go Up if I Consolidate my Debt?

Consolidating your debt may increase your score as long as you manage your monthly repayments diligently. Otherwise, it may hurt your credit score and put you into deeper debt.

3. When should I not Choose a Debt Consolidation Loan?

You should not choose a debt consolidation loan if you think that you can not afford the monthly repayments with your current income flow. Further, the success of paying debt will also depend on one’s financial habits. It is also worth noting that loans such as medical, business, and education loans cannot be consolidated with a debt consolidating plan. 


No one wants to be in an endless debt, but debt consolidation and personal loans are great options if you are in such situation. After all, debt does not only take a significant toll on one’s finances but also on one’s mental and emotional well-being. It may be tough to get out of debt quickly, but with the right financial tools and discipline, you can do so.

  • A debt consolidation loan is a type of personal loan used specifically to pay off existing debts.
  • Consider debt consolidation if you have several high-interest loans.
  • Debt consolidation loans can be an excellent way to become debt-free but long-term commitment and financial discipline are also essential.

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