A:

Debt can be broken down into secured debts, unsecured debts and government debts, such as taxes, government loans and court-ordered debts. Almost all privately offered debt consolidation services focus on unsecured debts only, such as credit cards, monthly bills and educational loans. Under certain circumstances, the Internal Revenue Service (IRS) allows you to consolidate separate tax bills into one loan. It is possible to consolidate secured debts into one loan, but this normally requires pledging additional or replacement collateral.

Perhaps the most common form of debt consolidation involves student loans. As the costs of higher education rise, students are turning to more government and private loans to finance their tuition. It is not uncommon for a student to graduate from a four-year program with more than a dozen different student loans, each with different interest rates, loan balances, grace periods and repayment lengths. Depending on the types of student loans, borrowers can choose between direct consolidation loans through the U.S. Department of Education or private consolidation loans through major financial institutions.

Lesser-known are consolidation loans for those with major tax bills. According to the IRS, the tax collection agency will "generally approve an offer in compromise when the amount offered represents the most we can expect to collect within a reasonable period of time." The IRS is like any other creditor in the sense that it is always looking for strategies to maximize its accounts receivables.

Companies that offer private consolidation loans are likely to allow unsecured loans to be lumped together, even when the debts are dissimilar. For example, you might be able to combine your credit card debt, department store credit debt, utility bills, medical bills, unsecured personal loans, select student loans and debts owed to collection agencies, all in one consolidation loan. Even if the underlying debts are all unsecured, it is possible to secure a consolidation loan with some of your assets – such as your home, car, retirement accounts or insurance policy – for lower rates or higher balances.

It is harder to get approved for a consolidation loan that includes secured debts. Companies that are willing to offer such loans normally require new collateral. They either arrange to have your collateral evaluated by an appraiser or require that you do the same before the loan is approved.

The advantages of consolidation loans can be significant. You can simplify your debts into a consistent monthly payment, reduce your monthly payments and possibly lock in a lower interest rate. However, you sometimes end up paying more in interest through the consolidation loan than you would have with your separate loans. You could hurt your credit score if you use your consolidation loan to replace long-standing debts with consistent payment histories.

RELATED FAQS
  1. Are secured personal loans better than unsecured loans?

    Read about the differences between secured loans and unsecured loans and how they are used. Learn about forms of collateral ... Read Answer >>
Related Articles
  1. Investing

    7 Ways To Consolidate Debt

    Different loan sources to use when you consolidate debt.
  2. Personal Finance

    Student Loan Debt: Is Consolidation The Answer?

    Consolidating student loans entails taking out a new loan to pay off existing loans. It sounds simple, but there are a few things to keep in mind.
  3. Personal Finance

    10 Tips to Topple Student Loan Debt

    How to manage those burdensome payments as you embark on adult life.
  4. Taxes

    Debt Consolidation: When It Helps, When It Doesn't

    Here's the smart way to use a debt consolidation to get your financial life back on track
  5. Managing Wealth

    When Are Personal Loans a Good Idea?

    You never want to borrow money for frivolous reasons, but these five circumstances might warrant it.
  6. Insights

    Top 4 Companies that Consolidate Private Student Loans (CFG)

    Consolidating your student loans can save you money.
  7. Personal Finance

    How to Get Your Student Loans Forgiven

    The prospect of debt forgiveness may seem like a dream come true. In reality, though, not that many people end up being eligible.
  8. Personal Finance

    Why You Should Be Wary About Most Student Debt Advice

    Falling victim to bad student debt advice can drain your wallet. Take a look at the most common ploys you want to steer clear of.
RELATED TERMS
  1. Direct Consolidation Loan

    A loan that combines two or more federal education loans into ...
  2. Student Loan Forgiveness

    Under certain circumstances, federally backed student loans — ...
  3. Unsecured Loan

    A loan that is issued and supported only by the borrower's creditworthiness, ...
  4. Loan

    The act of giving money, property or other material goods to ...
  5. Loan Commitment

    A loan commitment is a loan that may be drawn down or is due ...
  6. Education Loan

    Money borrowed to finance education or school related expenses. ...
Hot Definitions
  1. Contango

    A situation where the futures price of a commodity is above the expected future spot price. Contango refers to a situation ...
  2. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  3. Acid-Test Ratio

    A stringent indicator that indicates whether a firm has sufficient short-term assets to cover its immediate liabilities. ...
  4. Floating Exchange Rate

    A country's exchange rate regime where its currency is set by the foreign-exchange market through supply and demand for that ...
  5. Taxes

    An involuntary fee levied on corporations or individuals that is enforced by a level of government in order to finance government ...
  6. Impaired Asset

    A company's asset that is worth less on the market than the value listed on the company's balance sheet. This will result ...
Trading Center