What Is Debt Consolidation?
Debt consolidation describes the act of taking out a new loan to repay other liabilities and consumer debts. Multiple debts are combined into a single, larger debt, such as a loan, usually with more favorable payoff terms-- a reduced interest rate, lower monthly payment, or both. Debt consolidation can be utilized as a resource to handle student loan debt, credit card debt, and various other liabilities.
How Debt Consolidation Works
Debt consolidation is the process of using various forms of financing to repay other debts and liabilities. If you are saddled with various forms of debt, you can request a loan to consolidate those debts into a single liability and pay them off. Payments are then made on the new debt until it is paid off completely.
The majority of people apply via their bank, credit union, or credit card company for a debt consolidation loan as their first step. It's a good place to start, particularly if you have a great relationship and payment history with your institution. If you're turned down, try looking into private mortgage companies or lenders.
Creditors are willing to do this for several reasons. Debt consolidation increases the probability of collecting from a borrower. These loans are typically provided by financial institutions such as banks and credit unions, however there are other specialized debt consolidation service companies that provide these services to the public.
A vital point to keep in mind is that debt consolidation loans don't eliminate the original debt. Rather, they merely transfer a consumer's loans to a different lender or type of loan. For actual debt relief or for those that don't get approved for loans, it might be best to consider a debt settlement rather than, or in conjunction with, a debt consolidation loan.