Though we found many uses for the term "debt consolidation", including consumer credit counseling, debt management, debt negotiation and debt settlement, the true definition of debt consolidation is: acquiring a loan to pay off one or more other loans or accounts.
Debt consolidation seems to achieve several important goals for consumers. Because the new loan pays off several other loans or credit card accounts, the consumer reduces the number of bills to be paid each month. Many debt consolidation loans have superior interest rates and terms reducing the total amount the consumer will eventually pay to satisfy the obligations included in the debt consolidation. In cases where a first mortgage is used to consolidate the debt, the monthly payment is greatly reduced. The consumer's credit score is generally immediately increased because of the full satisfaction of multiple accounts or loans.
There are several methods and loan types we found used in debt consolidation. There are new 1st mortgages, 2nd mortgages, home equity lines of credit, home equity loans, personal loans, unsecured debt consolidation loans, personal lines of credit, other credit cards.
When debt is consolidated using home equity, the monthly payment is greatly reduced. For example, a typical credit card requires 2% of the current balance as a minimum monthly payment. A first mortgage requires less than 1% and a home equity line of credit (interest only) requiring a monthly payment of around 0.5%:
