Definition
Consolidation is the act of combining certain debts so that only one monthly payment with restated account terms is required by the consumer.
Analysis
Consolidation can take many forms, but the main premise is that a consumer with multiple debts can simplify repayment by making a single payment on their debt. The new terms may or may not be better than original terms with the individual lenders.
A consolidation loan is a new loan that pays off old debt accounts. A consumer that qualifies may consolidate multiple debts into one common loan with a single set of terms. Some consolidation loans are unsecured, while others tap into home equity as collateral for the loan.
Some consumers find that they can consolidate multiple debt accounts by using balance transfers. This moves debt balances to another card which may have separate interest rates for its split balances.
Credit counseling also has a tool that allows for consolidated payments without the creditworthiness requirements that other consolidation methods require. A debt management program (DMP) enables a consumer to make a single consolidated payment that is disbursed to multiple creditors. Repayment terms through a DMP vary by creditor, but they tend to make repayment much easier for a financially distressed consumer.
