Debt Consolidation

Debt Consolidation implies taking out one loan to pay off many others. This is usually done to secure a lower interest rate, secure a fixed interest rate or for the convenience of servicing just one loan.

Debt consolidation generally involves a secured loan against a collateral, which is most commonly a house. The collateralization of the loan allows a lower interest rate than without it, because by collateralizing, the asset owner agrees to allow the foreclosure of the asset to pay back the loan. The risk to the lender is reduced so the interest rate offered is lower.

On certain occasions, debt consolidation companies can discount the amount of the loan. When the debtor is in danger of bankruptcy, the debt consolidator will buy the loan at a discount. A prudent debtor can shop around for consolidators who will pass along some of the savings. Consolidation can affect the ability of the debtor to discharge debts in bankruptcy, so the decision to consolidate must be weighed carefully.

These days debt consolidations are often done for paying back ones credit card debt. Debtors with property such as a home or car may get a lower rate through a secured loan using their property as collateral. Many people are in credit card debt because they spend more than their income. If that continues, the consolidation will not benefit them much because they will simply increase their credit card balances again. Source: wikipedia