Definition
Debt Consolidation
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Debt consolidation is the act of combining several debt obligations into one to either save on interest charges, or make it easier to keep track of them, or both.
Debt consolidation is a common practice among general consumers but never taken notice off.
For example, consumer might use the funds from a credit card to pay off two other credit card. This results in one credit card with an outstanding bill instead of two. Moreover, the single card used might have cash rebates or rewards points to make the transaction even more worthwhile.
On a larger scale home equity loans and HELOCs are often used for debt consolidation purposes.
Firstly because when property is involved, loans become larger. This makes it possible to repay and redeem numerous different debt obligations.
Secondly, because these are secured loans, they tend to be low in interest rates. This means that a borrower can effectively benefit from interest savings when taking up an equity loan with 2% interest to pay off credit card bills at 24%.
The problem with debt consolidation however, is that once a borrower starts going through this route for funds, he might see how easy it is and make a habit out of it.
Going deeper and deeper into the debt trap.
Finally, don’t forget that the loan needs to be repaid.
So even though it can be cheap, borrowing a larger loan will still mean more interest costs.
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