What Is Debt Consolidation?
Debt consolidation refers to the act of taking out a new loan to pay off other liabilities and consumer debts. Multiple debts are combined into a single, larger debt, such as a loan, typically with more favorable payback terms-- a lower interest rate, lower monthly payment, or both. Debt consolidation can be used as a tool to deal with student loan debt, credit card debt, and various other liabilities.
How Debt Consolidation Works
Debt consolidation is the process of using different types of financing to repay other debts and liabilities. If you are saddled with various types 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 repaid completely.
Most consumers 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, especially if you have a great relationship and repayment record with your institution. If you're declined, try exploring private mortgage companies or lenders.
Creditors agree to do this for a number of reasons. Debt consolidation maximizes the probability of collecting from a borrower. These loans are generally offered by financial institutions such as banks and credit unions, but 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 do not erase the original debt. Instead, they merely transfer an individual's loans to a different lender or type of loan. For actual debt relief or for those that do not qualify for loans, it might be best to consider a debt settlement rather than, or together with, a debt consolidation loan.