Debt Consolidation
Combining multiple debts into a single loan, ideally at a lower interest rate.
What is Debt Consolidation?
Debt consolidation is the process of combining multiple debts — such as credit card balances, personal loans, or medical bills — into a single loan with one monthly payment. The goal is typically to reduce the average interest rate, simplify repayment, and potentially lower the monthly payment or accelerate payoff. Common methods include personal consolidation loans, balance transfer credit cards, and home equity loans. Debt consolidation does not reduce the principal owed; it restructures repayment terms. Without addressing the spending behavior that created the debt, consolidation may provide only temporary relief.
Example
A borrower with $15,000 across three credit cards at 22%, 26%, and 29% APR consolidates into a 3-year personal loan at 12% APR, reducing monthly interest charges significantly and setting a fixed payoff timeline.
Source: Consumer Financial Protection Bureau — Debt Collection