Debt consolidation is the process of taking out a loan in order to pay off other debts. It is usually done to obtain a lower interest rate that may be variable, or to switch to a fixed rate. It is also done so the borrower only has to worry about one payment instead of addressing several different debts.
Debt consolidation can be pursued when one has several unsecured loans and intends on combining them into another unsecured loan. However, the most common scenario involves a secured loan tied to an asset. The most commonly used asset is a home.
For example, a mortgage is secured against a house. When you collateralize a loan it allows for a lowered interest rate. If there is a problem with payment of the loan, the asset owner agrees to foreclose on the property in order to pay the loan back to the lender. This way, the lender is in a less vulnerable position.
There are times when debt consolidation companies choose to discount a loan. If the borrower is in danger of going bankrupt then the debt consolidation company may choose to buy the loan at a discount. If you are a debtor with a shrewd sense, you will take the time to shop around for different consolidators who offer the best discounts.
Debt consolidation is highly recommended if you are someone who has accumulated large amounts of credit card debt. Credit cards usually have a much higher interest rate. Debt consolidation can save the debtor a lot of money.