Debt consolidation involves taking out a loan to pay off multiple loans. This is usually done to secure a lower interest rate and for the convenience of paying only one loan.
Debt consolidation usually entails taking a secured loan against an asset, such as a house, and using this to pay off higher-interest unsecured loans and credit card debts. However this puts the individuals assets at risk if they do not keep up payment.
Sometimes, debt consolidation companies will 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.
