Debt Consolidation

Loading the player...

What is 'Debt Consolidation'

The combining of several unsecured debts into a single, new loan that is more favorable. Debt consolidation involves taking out a new loan to pay off a number of other debts. The new loan may result in a lower interest rate, lower monthly payment or both. Consumers can use debt consolidation as a tool to make it easier to get out of student loan debt, credit card debt and other types of debt that aren’t tied to an asset.

BREAKING DOWN 'Debt Consolidation'

There are several pitfalls consumers should consider when consolidating debt:

– Extending the loan term. Your monthly payment and interest rate might be lower, but you might pay more interest in the long run if you take longer to pay back what you owe.

– Continuing to spend beyond your means. Consolidating debt alone does not get you out of debt; improving spending and saving habits is key. Put your old credit cards in a drawer so you won't use them and don’t apply for new ones to avoid getting back into debt.

– Using a home equity loan or line of credit to consolidate consumer debt. While these loans offer low interest rates and deductible interest for taxpayers who itemize their deductions, they also put your home at risk if you fail to make the required payments. Be very cautious about taking this route. It doesn’t make sense to lose your house because you couldn’t pay your credit card bills.

– Paying expensive fees to a debt-consolidation service. You can consolidate your debt yourself for free with a new loan or low-interest credit card.

– Consolidating debt for convenience. The simplicity of a single monthly payment is not a sufficient reason to consolidate debt.

A reputable nonprofit consumer credit-counseling organization can help consumers consolidate debt wisely and at little cost. The organization can negotiate more favorable terms with creditors to help you get out of debt faster and at lower cost. It also can manage repayment for you so you’re less likely to have late or missed payments that accrue fees and more interest.

RELATED TERMS
  1. Consolidate

    The combining of assets, liabilities and other financial items ...
  2. Debt

    An amount of money borrowed by one party from another. Many corporations/individuals ...
  3. Credit Card

    A card issued by a financial company giving the holder an option ...
  4. Refinance

    1. When a business or person revises a payment schedule for repaying ...
  5. Reloading

    A term lenders commonly use to refer to the habits of borrowers ...
  6. Loan

    The act of giving money, property or other material goods to ...
Related Articles
  1. Budgeting

    Debt Consolidation Made Easy

    These five steps can help get you out of debt faster and easier than you'd ever imagined.
  2. Credit & Loans

    Digging Out Of Personal Debt

    Find out why good intentions can put consumers in an even bigger hole than before.
  3. Retirement

    Student Loan Debt: Is Consolidation The Answer?

    Consolidating your student loans offers convenience, but there are drawbacks.
  4. Budgeting

    Consolidating Debt

    Debt consolidation is one of the most powerful tools for debt elimination. Find out how this process works and what it can do for your personal finances.
  5. Options & Futures

    Top 7 Most Common Financial Mistakes

    Choose fortune over disaster by avoiding these money traps.
  6. Savings

    The Difference Between Compounding Interest and Simple Interest

    Interest is the cost a borrower pays to use someone else’s money. Interest can be either simple or compounded.
  7. Home & Auto

    Where Rents Are Rising Most (Or Not So Much)

    If you’re in the market for rental housing, rents are rising more slowly in major metro areas; secondary-market rents, however, are growing faster.
  8. Retirement

    When a 401(k) Hardship Withdrawal Makes Sense

    If you've exhausted all other avenues, there are ways to withdraw funds before age 59½ – sometimes without the 10% penalty that's usually due.
  9. Budgeting

    6 Best Personal Finance Apps

    The right app can help you track your bills, monitor your bank accounts and credit cards, and otherwise stay on top of your financial life.
  10. Investing News

    Does 2016 Spell the End of a Global Debt Cycle?

    Examine the growth of global debt from 2010 to 2015. Emerging market debt has grown significantly, while advanced economy debt has grown marginally.
RELATED FAQS
  1. How can I use quantitative analysis to evaluate investment decisions if I don't have ...

    Discover whether companies that advertise debt consolidation services are legitimate. Some may take advantage of people who ... Read Answer >>
  2. How can I budget for both short-term expenses and long-term goals?

    The first step in planning for long-term goals is actually determining how much you spend on short-term expenses. Once you ... Read Answer >>
  3. Are credit card rewards considered taxable income by the IRS?

    Learn about when the Internal Revenue Service considers the financial value of gifts received from credit card reward programs ... Read Answer >>
  4. How can I borrow money from my life insurance policy?

    Capitalize on the cash value of your whole life insurance policy and learn the details of how to borrow money from your life ... Read Answer >>
  5. Debt Counseling: 4 Signs You Need Help

    Stop stressing about debt and bills and avoiding phone calls from debt collectors. Get help from a debt and credit counselor ... Read Answer >>
  6. What is the 50/20/30 budget rule?

    Learn about Elizabeth Warren's 50/30/20 budget rule, a simple and effective plan for personal money management and wealth ... Read Answer >>
Hot Definitions
  1. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  2. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  3. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
  4. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
  5. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  6. Economies Of Scale

    Economies of scale is the cost advantage that arises with increased output of a product. Economies of scale arise because ...
Trading Center