What Exactly Is Debt Consolidation?

Simply put, debt consolidation is the process of combining multiple debts into a single one. These debts are normally borrowed at high interest rates, so the idea for most people is to consolidate them at a lower interest rate. This lowers the cost of borrowing, and adds the extra convenience of dealing with fewer creditors and individual bills each month.

Debt consolidation works best when you take a number of unsecured loans and combine them into one secured one, which usually means having collateral (like a house) to put up. A secured loan will normally carry lower interest rates, which offer the most savings for the consolidator. That said, there are programs available for people who do not own a home or other assets to qualify for a secured loan, though the savings may not be as large because the interest on the consolidated loan may be higher. If you have a high credit score, more savings are possible. Speak with a credit repair specialist to learn how you can raise your credit score and save more by consolidating.

  1. While debt consolidation is something you can do by yourself, there are companies that typically offer a full debt management program including consolidation, and most consumers elect to utilize such a program rather than take the task on alone.
  2. While some "debt consolidation" companies can in fact reduce your debt burden by reducing what's owed to your creditors - this is technically debt settlement or debt negotiation, a very different process.

If you're currently paying high interest on more than one account, whether they are credit cards, medical bills or just about any other type of unsecured loan; debt consolidation is likely a good option for you provided you qualify for a lower-interest loan. The better interest rates will allow you to reduce your total payments and pay off your debts much faster and with less hassle.