What is Debt Consolidation?

Debt ConsolidationThe definition of debt consolidation would be: The act of consolidating several debts and financial obligations into one. The simplest explanation of debt consolidation would be to describe it as turning several monthly payments into one payment per month.

There are many reasons as to why a person may want to consolidate their debt. These reasons range from wanting to secure a lower cumulative interest rate, to avoiding bankruptcy. There are two distinct types of debt consolidation; With or Without a loan.

Debt Consolidation With a Loan

A debt consolidation loan is an act of taking out one loan to pay several smaller loans, preferably at a reduced interest rate from the rates of the smaller loans, since many credit cards have interest rates in the teens to the high twenties in terms of percentage points. In some cases, due to the interest rates being lower, individuals may obtain a smaller monthly payment.

Debt Consolidation Without a Loan

Usually accomplished through a debt consolidation plan, also known as a debt management plan (DMP), offered by credit counseling organizations. The primary focus of these plans are to obtain reduced interest rates on an individual’s credit cards and other unsecured debt. Another common goal of debt consolidation is to lower the overall monthly payment in order to provide immediate relief to the individual. Lower payments can typically be obtained due to the interest rate reductions that many creditors provide.

The types of debt credit counselors may work with include but are not limited to, credit cards, collection accounts, personal loans, payday loans and other unsecured debt.

A home loan or an automobile loan would be considered secured loans; therefore a credit counseling agency would not be able to obtain reduced interest rates or payments due to the loans being secured with collateral.

Alternatives to Debt Consolidation

There are essentially three alternatives to debt consolidation. Each comes with differing benefits to the consumer and provides different risk vs. reward scenarios.

Debt SettlementDebt Settlement or Debt Negotiation

In this scenario, you would stop paying your bills altogether. These may be the most prominent ads currently. The draw is that you can simply stop paying and save upwards of 60% or more on your debt. The reality is that by not paying your bills your credit rating becomes trashed. In some cases, a creditor can still sue for the unpaid amount. Another worrisome problem is that there have been unscrupulous debt settlement outfits that have defrauded their clientele.


Your credit score may take a heavy hit, but if you can file for a chapter 7 bankruptcy, you may be able to get your unsecured debt cleared. This can help provide a fresh start and put you back on track to restoring your credit rating. In some instances, where an individual is truly unable to repay their debt, filing bankruptcy may be in an individual’s best interest.

Payment PlanCreating Your Own Payment Plan

In many cases, by making personal sacrifices and budget adjustments, an individual may find themselves better off by developing their own payment plan. It is important to attempt to pay back more than the minimum monthly payments owed in order to get ahead. If the bills are already in arrears it may be difficult to overcome the late and over limit fees along with the higher interest rates. Creating your own payment plan works best when accounts are current.

*Debt Elimination (not a true alternative)

Watch out for this one. Although not a true alternative to debt consolidation we’ve decided to address it. Undoubtedly you’ve seen advertisements that claim they can easily erase your debt for a lump sum payment. Many of these ads are seen hidden in the corners of the internet and out of scrutiny. We recommend ignoring those ads and spam messages and seeking a safer and working, alternative.

When to Seek Help