Debt Consolidation

Debt consolidation is the process of taking out one loan to pay off others. The borrower can usually obtain a lower interest rate, get a fixed rate or have the convenience of having only one loan to deal with.

Debt consolidation often involves a secured loan against an asset that serves as collateral, most commonly a house. Having this collateral allows for a lower interest rate than without it, because the owner agrees to allow the foreclosure of the asset to pay back the loan. The interest rate offered is lower due to the reduced risk to the lender.

When someone is paying off credit card debt, consolidation is often advisable. Credit cards carry a much larger interest rate than even an unsecured bank loan. Debtors with property, such as a house or car, may get a lower rate through a secured loan using their property as collateral. The total interest and the total cash flow paid towards the debt is then lower, allowing the debt to be paid off sooner, while incurring less interest.