Debt consolidation entails taking out one loan
to pay off many others. This is often done to secure a lower interest
rate, secure a fixed interest rate or for the convenience of
servicing only one loan. Often, student
loans are consolidated for all of the above reasons.
Sometimes, debt consolidation companies can discount the amount
of the loan. When the debtor is in danger of bankruptcy,
the debt consolidator will buy the loan at a discount. A prudent
debtor can shop around for consolidators who will pass along some
of the savings. Consolidation can affect the ability of the debtor
to discharge debts in bankruptcy, so the decision to consolidate
must be weighed carefully.
Debt consolidation is often advisable when someone is paying credit
card debt. Credit
cards can carry a much larger interest
rate than even an unsecured loan from a bank. Debtors with property
such as a home or car may get a lower rate through a secured loan
using their property as collateral.