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. Debt Avalanche

    A method that involves making the minimum payment on each debt, ...
  2. Debt Snowball

    A method of debt repayment in which debtors pay off their smallest ...
  3. Debt Service

    The cash that is required for a particular time period to cover ...
  4. Long-Term Debt

    Long-term debt consists of loans and financial obligations lasting ...
  5. Preferred Debt

    Debt that is considered more important or has priority over other ...
  6. Re-Aging Debt

    Restarting the clock on a debt’s statute of limitations.
Related Articles
  1. Credit & Loans

    Digging Out Of Personal Debt

    Find out why good intentions can put consumers in an even bigger hole than before.
  2. Credit & Loans

    Consolidating Debt: What If You Have Bad Credit?

    Getting a debt consolidation loan is more difficult when you have bad credit. But it could still help put you on the road to improving your credit score.
  3. Credit & Loans

    Debt Consolidation Companies – The Pros And Cons

    Debt consolidation is an attractive option for cash-strapped consumers who are struggling with debt, but make sure you are dealing with the right company.
  4. Credit & Loans

    4 Debt-Busting AlternativesTo Balance Transfers

    Credit card balance transfers can help pay off debts – but they can cost you. Here are some other approaches worth checking out.
  5. Budgeting

    Debt Consolidation Made Easy

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

    Time To Consolidate Your Student Loans?

    Use these strategies to decide whether consolidating your student loans makes sense for you – and what to do next if it does.
  7. Credit & Loans

    Student Loans: Federal Loan Consolidation

    Federal loan consolidation is a helpful tool for converting an unmanageable payment into a manageable payment by combining multiple semester loans into one loan and extending your repayment schedule. ...
  8. Credit & Loans

    A Lifeline For Those Drowning In Debt

    Don't wait to be saved, find out where the lifesaving devices are and hang on tight!
  9. Personal Finance

    10 Surefire Signs You’ll Ruin Your Financial Life and Die With Debt

    For many Americans, debt is a way of life. Loans allow most Americans to pay for their cars, education, and houses. But how much debt it is too much?
  10. Investing

    Why a Rise In the National Debt Is Good for You

    In the first quarter of the year, the household national debt for Americans was $129 billion. Yet contrary to popular belief, debt is not always a bad thing.
RELATED FAQS
  1. What are some examples of debts that I can consolidate?

    Read about different kinds of debts than can be combined into a consolidation loan, including unsecured debts, secured debts ... Read Answer >>
  2. What's the difference between debt consolidation and debt settlement?

    Learn the differences between negotiating a debt settlement with your existing creditors and applying for a new consolidation ... Read Answer >>
  3. What's the difference between debt consolidation and debt management or debt settlement?

    Learn about different ways of handling debt when you become overwhelmed, including debt consolidation, debt management and ... Read Answer >>
  4. Will my credit score suffer from debt consolidation or refinancing?

    Learn how different debt relief options – consolidation, settlement, credit counseling and bankruptcy – could affect your ... Read Answer >>
  5. Is it wise to consolidate credit card debt?

    In most cases, credit card consolidation is a wise decision if you are able to get a lower interest rate with the new company ... Read Answer >>
  6. Is it better to get a balance transfer or a personal loan to pay off my credit card ...

    Find out what you should consider before deciding to pay off your credit card debt by taking out a personal loan or using ... Read Answer >>
Hot Definitions
  1. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  2. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  3. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  4. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  5. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  6. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
Trading Center