Debt Consolidation Strategy

Debt consolidation is a strategy that people often use to help make several loans or debts more manageable. This is done by using one new loan to combine, or consolidate, several other loans or debts. Primary reasons for consolidating loans include securing a lower interest rate collectively on the debt, securing a fixed rather than variable interest rate, or achieving increased convenience by having only one loan to make payments on rather than several. A frequently touted reason for utilizing debt consolidation is the possibility of decreasing payment amounts when compared to making payments on each incorporated loan separately.



Debt consolidation can occur under many circumstances, from combining education loans for convenience, to consolidating credit card balances to avoid bankruptcy. While debt consolidation can be from several unsecured loans to a single unsecured loan, consolidation often involves moving to a single secured loan, borrowed against collateral such as a home or car. While this type of loan lowers the risk to the lender, allowing the lender to offer lower interest rates in return, the risk to the debtor is significantly increased. Should the debtor fail to make payments or default on the loan, they are then in danger of having the collateral, typically a house, foreclosed upon in order to pay off the secured loan to the lender.



Prudence should certainly be taken when taking out a loan secured on an asset such as a home or car, in order to avoid loss of the collateral by the debtor. Seeking debt consolidation can be a good option for people who have several high interest credit card balances, or for those who hold several federal or even private student loans. For those who have several high interest credit card balances, transferring all of these balances to even an unsecured loan from a bank or credit union can result in significantly lower interest rates. Since the interest rate may be lower, and several payments have been rolled into one loan, the monthly payments are also often lower and more manageable to pay. In the case of student loans, consolidation is a common practice, and is offered through Federal Direct Consolidation Loans, as well as several private companies. When student loans are consolidated, the interest rates are averaged, usually resulting in a lower interest rate (but not always), and payments are typically lowered noticeably.

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Debt consolidation is a strategy that people often use to help make several loans or debts more manageable.
Debt consolidation can occur under many circumstances, from combining education loans for convenience, to consolidating credit card balances to avoid bankruptcy.

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