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Debt consolidation refers to taking a loan in order to pay back various others. This is generally preferred because an individual is entitled to pay a comparatively lower rate of interest by this method, or in some cases to ensure a fixed rate of interest as opposed to the variable interest rates on other loans. Another reason to opt for debt consolidation is merely to avoid the inconvenience of paying several loans and to pay simply one loan.

Debt consolidation can also be to club various unsecured loans into a single unsecured loan. However, in most cases, it deals with secured loans that are taken against some collateral security such as house. In such a case, the mortgage is extended against the house or any other collateral security. The collateralization of any loan permits a lower interest rate to an individual as it means that the individual agrees for the sale of the collateral security if he fails to make the agreed payment of the loan on time. This reduces the risk involved on the part of the lender and he thereby agrees to extend the amount at a lower rate of interest.

At times, companies who deal in debt consolidation provide an option to discount the loan amount. In case a debtor has a risk to turn bankrupt, these companies will purchase the loan from him at a discounted rate. A careful debtor can look for consolidators who offer him the best deal and add on to his savings. Debt consolidation has an affect on the debtor’s capability to pay debts at the time of bankruptcy, so one must be careful about taking the right consolidation decision.

Normally, debt consolidation is suggested as an alternative especially for the payment of loans on credit card. Credit card usually has a higher interest rate as opposed to an unsecured loan taken from any bank. Debtors who possess some property like a car or a home may be able to secure it at a lower interest rate by a secured loan if they agree to make their property, a collateral security. This will reduce the total cash that has to be paid for the debt along with a lower interest rate, which enables the payment of debt in a short period of time. On an average, many people are under the problem of debts on credit card, as their expenditure exceeds their earnings. If they do not keep a check on their expenditure, even debt consolidation won’t be of any help to them as their credit card balance will increase again.