What Is Debt Consolidation?

By Author: Brianna Harmer
Total Articles: 4
Comment this article

Debt consolidation describes the act of taking out a single loan in order to pay off multiple others. For example, if you had a mortgage, a credit card loan and another bank loan that you used to buy a bike for example, you could then consolidate all of these debts by taking out one larger loan that would pay off all those three loans. This can be done ‘manually' - as in handled on your own (i.e. you take out the loan and pay off the debts with it then concentrate on paying off the final loan) or using a debt consolidation service or company who can also help advise you, discuss options and negotiate terms and potentially even reduce some of your other debts. Often debts are consolidated into a single home loan.

There are many reasons to consolidate your debts into a single loan. The most obvious reason is to benefit from lower interest rates or a fixed interest rate. For example if you have one or several loans with a particularly high interest rate, you can pay them off with a single loan that has a lower interest rate and thereby decrease the overall amount you will be paying. It's possible to get loans at zero ...
... percent APR helping you to save a lot of money on your interest. Just the fact that you have interest on a single loan rather than multiple loans can also make interest much easier to calculate and to plan for, and can make the loans themselves much easier to pay. If you have about 5 loan repayments coming out of your current account it can be highly stressful and very complicated, whereas having just one on a regular basis can make it easy to plan for and pay. Using a service to consolidate your loans can also often make the loan repayment more flexible to suit you - you can pay it off more quickly in several larger lump sums, or can drag it out over time. You should also be able to set the day that the repayment comes out to help fit it around your other financial commitments. In these ways loan consolidation is sensible from a practical stand point as well as a financial one.

Sometimes this loan is simply be another loan much like your others (this is called an ‘unsecured' loan), however in most cases the loan is taken out against an asset of the borrower as collateral. Most commonly this asset is the borrower's home and the mortgage is secured against the house. Here, by using the mortgage as collateral, the interest rate is able to be lower than it would otherwise. Thus consolidation of debt into a home loan is able to save you even more money. The down side of course is that the borrower agrees the foreclosure of their asset (in this case the home) to pay back the loan. However for those who are not in a desperate situation and can afford to pay back their new loan comfortably, this is a sensible way to save money and unnecessary stress. In a similar vein mortgages can also be increased, or you can take out entirely new mortgages, to pay for extra work around a house or other expenses rather than paying for various separate jobs individually. This is similar in theory but requires more forward planning. This two could be considered a type of debt consolidation using a home loan, except using the reverse process to that outlined above.

With rising interest rates debt consolidation home loans are becoming more popular. The purpose of most peoples debt consolidation homeloans is to spread the payment of personal loans over a longer time period.