What Is Debt Consolidation?

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You’ve probably heard the term ‘debt consolidation’ in the media or from your mail, right? As prices keep going up at the pump, through energy costs, taxes and even grocery bills, consumers are finding their financial budget getting tighter and tighter. Debt is starting to squeeze the wallet harder every day. As debt turns from a mole hill to a mountain, consumers begin to look for some kind of relief. This is where debt consolidation comes into play.

When faced with mounting debt, we often consider two options: debt settlement vs debt consolidation. If you want to protect your credit rating, debt settlement is not for you. That being the case, debt consolidation is the wise choice. Even so, you may be asking: what is debt consolidation?

Debt consolidation is the process of combining all your bills into one loan, which results in one single monthly payment. A popular reason for choosing debt consolidation is that it often lowers the monthly payment. It can also be the means of securing a lower interest rate. The ultimate goal of debt consolidation is to free up money within the budget and to help pay off debt faster.

Another answer to the question ‘what is debt consolidation’ is that you can combine several unsecured debts into one secured loan. When you do this, you have provided something that lending institutions are looking for, because a secured loan requires collateral; and the typical collateral for this type loan is a house. This is why consumers are bombarded with home equity loan offers on a regular basis because a home equity loan is a secured loan by means of its equity that translates into collateral for the lending company.

Also, a collateral loan typically offers a lower interest rate to the consumer, because the lender is at less risk. In addition, the consumer finds the lower interest rate to be an attractive way to stretch their budget.

When asking ‘what is debt consolidation’ regarding student loans, the steps are different for consolidating student loans than for unsecured debt from credit cards. Student loans are primarily used to pay for college expenses, but can become quite a burdensome debt to satisfy over the years.

Students desiring to consolidate their student loan debt are allowed to consolidate debt with a private lender one time in order to receive a better interest rate and realize one monthly payment instead of several. After the student has taken advantage of this one time private refinance option, they can only refinance again through the Department of Education. Even though the appearance puts forth the belief that student loans are being consolidated, they are not actually being refinanced. In reality, the debt is locked into a specific rate of interest as opposed to the standard refinancing mindset.

Hopefully this article has helped answer your question ‘what is debt consolidation’. Keep in mind, debt consolidation can be very helpful for students and consumers alike to reduce interest payments and pay off debt.

Consolidating several bills into a single payment can ease the strain on the budget, but it comes at a price of putting up property as collateral. With research and planning, proper debt consolidation can positively affect the consumer’s financial situation. But, if you have not learned your lesson on how you got into this financial mess in the first place, debt consolidation will not typically improve your finances over time.

Don’t jeopardize the collateral in your house as a homeowner or the one-time chance to refinance those student loans by going back into debt. Keep your eyes on the financial freedom prize and a debt consolidation loan will be the best decision you have ever made for relieving the financial stress in your life.