Definition: Debt Consolidation


To consolidate debt means to roll many disparate debts into a single debt.

When consolidating debt, a borrower may gather debts from a variety of sources.

The average consumer may have:

•    Credit card debt
•    Department store card debt
•    A line of credit
•    A car loan
•    Installment accounts

Many of these types of debts have higher interest rates than those offered by banks. 



A consolidation loan pays off each of the individual debts, and creates one single loan that the borrower has to pay back.

In many cases, this is done to help increase cash flow and generate long-term savings when someone has borrowed beyond their ability to easily or effectively repay. 

Image Source: Debt Consolidation

The total overall amount that is needed to be repaid may be lower after you consolidate debt, and the amount of interest you pay back should certainly be less as well. 

There are other ways to consolidate debt besides taking out a loan expressly for that purpose.

Certain credit cards offer transfer rates where you can pay off old cards.

There are also certain types of mortgages where you can roll old debts into a new mortgage in order to consolidate debt.



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