Debt consolidation is the process of combining multiple loans into one. A consolidation loan does not reduce the amount you owe but can help you have a more manageable repayment schedule.
Function
By combining all of your loans into one, you will only have one larger payment to worry about each month rather than several or more smaller payments. This can reduce the chance that you will accidentally miss one of them and be hit with late fees and finance charges.
Purpose
Consolidation loans can be used to combine any type of debt into one loan with several common loans being student loans, credit card debt and auto loans.
Interest Rates
The interest rate on your consolidation loan will depend on your credit score and whether you are taking out a secured or unsecured loans. Secured loans will use your property---usually a home---as collateral that can be seized by the bank if you do not pay your loans on time. Since this makes the loan less risky you will pay a lower interest rate.
Advantages
Most people who consolidate their debt end up paying a lower interest rate than they did on the separate accounts. This is particularly true of credit card debt because of the very high interest rates charged by credit card companies.
Warning
Be sure to compare the interest rates and monthly payments before signing because if your credit score has gone down, you may have to pay a higher interest rate if you consolidate. In addition, if you use your home as collateral, be aware that if you fail to make your payments, you can lose your home.
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