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What is debt consolidation?


Debt = money you owe
Consolidation = combining into one
Debt Consolidation = combining several loans into one loan [1]


How? Debt Consolidation is achieved by taking out a new loan to pay off multiple existing loans. The total amount of debt stays constant.


  • lower monthly payments
    (because of lower interest rate, extended repayment period, or combination of both)
  • convenience of servicing a single loan
What? Debt Consolidation doesn't work for every type of debt. Only unsecured debts can be consolidated. Debt consolidation is mostly used to consolidate high-interest credit card or store debts (in some cases also unpaid medical bills, payday loans and cash advances).

What debt consolidation is NOT

Debt consolidation is NOT debt settlement.

Debt consolidation and debt settlement are two distinct debt relief options.

Debt settlement (also known as debt negotiation or debt reduction): you settle to pay back less than the total amount you owe. The problem is that the prerequisite to negotiating a reduced balance is typically to stop making your payments and default. This leads to late fees and penalty interest added to your debt amount, negative impact on your credit score, and potential litigation. It is estimated that as few as 10% of customers of debt settlement programs end up debt free in the promised period of time. [2]

Debt consolidation: your goal is NOT to repay only a portion of your total debt, but to consolidate it into a single loan. You still have to pay back your total debt in-full, but since the interest rate is lower and/or the term is extended, your monthly payments will be reduced. With debt consolidation, you do not stop making your regular payments, and your credit score will not be negatively affected.

Debt consolidation is NOT a solution to your debt problems.

Debt consolidation is only a form of debt relief, not a debt solution.
When having a severe toothache, you'll take a pain relief for temporary comfort, not as a cure for the dental problem that's causing the pain. Similarly, after consolidating your debt, your debt will still be there, and so will the underlying problem that got you into debt in the first place. If you think debt consolidation is a cure, rather than just a short term symptomatic relief, you will probably end up with more debt and a bigger problem down the road. So be sure to address and solve the underlying problem.

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  1. The term "debt consolidation" may be deceptive because by definition "to consolidate" means to merge or combine into one, but with "debt consolidation" the existing debts are not actually merged into a new loan, but rather they are paid back in full with the amount borrowed through a new single (debt consolidation) loan.
  2. "#1 Threat to America’s Most Indebted Consumers: Debt Settlement Programs (According to Lawyers)." Steven A. Meyerowitz. LexisNexis. October 17, 2012.