Debt Consolidation Benefits

Combining multiple debt obligations into just one loan or bill is known as debt consolidation. To consolidate multiple loans into just one, you take out a new loan that is large enough to pay off all of your other creditors combined. Using the new consolidation loan funds, you pay all of your other debts in full so that you're left paying just one debt -- the new consolidation loan -- each month.

Reduced Bills

If you take out a debt consolidation loan and use it to pay off all your outstanding bills and creditors, you typically make a reduced total monthly payment on the debt consolidation loan. If you normally pay a $300 monthly car payment, for example, along with $250 on credit cards and $75 on revolving credit accounts, you're paying $625 for debt each month. When you pay off these obligations with a consolidation loan, your monthly payment on the debt consolidation loan is likely less than the total of the individual debts, depending upon how you structure the loan.

Lower Interest Rates

When you take out a debt consolidation loan at your local bank or credit union, it's usual for that loan to have a lower interest rate than your existing debt payments do. This is particularly true if much of your outstanding debt is for credit cards, because credit card debt generally has a 15 to 20 percent rate, whereas a debt consolidation loan may carry only an 8 or 10 percent interest rate.

No More Collection Calls

Debt consolidation loans are used to pay off all your other existing creditors. When you use the loan to pay off each creditor, there are no longer any bills for them to harass you about. You stop receiving phone calls from the bill collections department, and you stop receiving intimidating letters and past due notices.

Peace of Mind

Most people find that having just one single bill payment to make each month is much easier to keep track of -- and stay current on -- than having five or 10 different bills to pay. By reducing your total monthly payment, you'll have the added benefit of being able to pay the regular household expenses without as much penny pinching. If you reduced your interest rate, you'll sleep easier knowing you're paying less money on that debt over the long term.