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 payback terms-- a lower interest rate, lower monthly payment, or both. Debt consolidation can be utilized as a resource to take care of student loan debt, credit card debt, and other liabilities.
How Debt Consolidation Works
Debt consolidation is the process of using various types of financing to pay off other debts and liabilities. If you are burdened with various types of debt, you can apply for 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 repaid in full.
The majority of consumers apply through their bank, credit union, or credit card provider for a debt consolidation loan as their first step. It's a good place to start, particularly if you have a good relationship and payment history with your institution. If you're denied, try checking out private mortgage companies or lenders.
Creditors agree to do this for several reasons. Debt consolidation increases the likelihood of collecting from a borrower. These loans are generally provided by financial institutions such as banks and credit unions, but there are various other specialized debt consolidation service companies that offer these services to the public.
An important point to keep in mind is that debt consolidation loans do not eliminate the original debt. Instead, they simply transfer a consumer's loans to a different lender or type of loan. For actual debt relief or for those who do not get approved for loans, it may be best to look into a debt settlement rather than, or in conjunction with, a debt consolidation loan.