Debt Consolidation

Definition: Debt Consolidation


Debt consolidation can take the form of home equity loans or lines of credit, balance transfers to a zero-percent interest credit card, and debt-consolidation loans. Debt management and credit counseling are other options to consider before shifting your debts.

Borrowing against your home means you could lose your home if you defaulted on the loan, but some consider this a favorable choice because equity loan interest generally is tax deductible. Zero-percent cards allow a borrower to pay debt at zero interest for an introductory period, but if the debt isn't paid within that short time, the borrower is again stuck paying regular rates and hasn't made much leeway.

When a financial institution consolidates a consumer's debts, it combines her multiple debts into one and lowers her monthly payment. Because this involves taking out a loan to pay off existing debts, there are risks involved and it doesn't solve underlying issues of why debt has been incurred in the first place. This should only be a viable option if the costs of the bundled loan will be less than the current payments to various creditors.

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