Debt Consolidation

Debt consolidation is taking out one loan to pay off many others. This is often done to have a lower interest rate (*APR), or for the convenience of dealing with only one loan.


Debt consolidation usually involves a secured loan against an asset that serves as collateral, most commonly a house. A mortgage is secured against the house. The asset owner agrees to allow the forced sale (foreclosure) of the asset to pay back the loan in case of default on the payments. The risk to the lender is reduced so the interest rate (*APR) offered is lower.


Debt consolidation is often advisable to pay off credit card debt. Credit cards usually have a much larger interest rate (*APR) than a loan. Debtors with property such as a home or car will usually get a lower rate (*APR) through a secured loan using their property as collateral.


With the lower interest rate (*APR), a larger part payment can go to the principal, allowing faster repayment.