What Is Debt Consolidation?

The term debt consolidation refers to the act of eliminating a replacement loan to pay off other liabilities and consumer debts, generally unsecured ones. Multiple debts are combined into one, larger piece of debt, usually with more favorable payoff terms. Favorable payoff terms include a lower rate of interest, lower monthly payment, or both. Consumers can use debt consolidation as a tool to handle student loan debt, credit card debt, and other liabilities.


  • Debt consolidation is the act of eliminating a replacement loan to pay off other liabilities and consumer debts, generally unsecured ones.

  • Debt consolidation loans don’t erase the initial debt but transfer a consumer's loans to a unique lender or sort of loan.

  • There are two different styles of debt consolidation loans: secured and unsecured.

  • Consumers can apply for debt consolidation loans, lower-interest credit cards, HELOCs, and special programs for student loans.

How Does Debt Consolidation Work?

Debt consolidation is the process of using different types of financing to pay off other debts and liabilities. So when a consumer is saddled with different styles of debt, they'll apply for a loan to consolidate those debts into one liability, and pay them off. Payments are then made to the new debt until it's paid off fully.

Creditors are willing to try this for several reasons. Debt consolidation maximizes the likelihood of collecting from a debtor. These loans are usually offered by financial institutions like banks and credit unions, but there are other specialized debt consolidation service companies that provide these services to the overall public.

Types of Debt Consolidation

There are two broad kinds of debt consolidation loans: secured and unsecured loans. Secured loans are backed by the one among the borrower’s assets like a house or a car. The asset, in turn, works as collateral for the loan.

Unsecured loans, on the opposite hand, don 't seem to be backed by assets and might be tougher to get. They also tend to own higher interest rates and lower qualifying amounts. With either sort of loan, interest rates are still typically less than the rates charged on credit cards. And in most cases, the rates are fixed, so that they don 't vary over the repayment period.

Important Note

Although a debt consolidation loan may reduce your payment or rate of interest, you will be responsible for additional fees.

Requirements for Debt Consolidation

Borrowers must have the income and creditworthiness necessary to qualify, especially if you are going to the latest lender. Although the sort of documentation you'll have often depended on your credit history, the foremost common pieces of knowledge include a letter of employment, two months ' worth of statements for every MasterCard or loan you want to pay off, and letters from creditors or repayment agencies.

From Team,

Sunita Finlease

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