Debt consolidation is when you take out one loan to pay off many others. This usually means you get a fixed overall lower interest rate and the convenience of servicing only one loan.

Typically, debt consolidation programs are debt repayment programs. They can consolidate most types of unsecured debts from major credit cards to personal and student loans.

Some debt consolidation loans are just home equity loans in disguise and often come with heavy application fees and can greatly extend the amount of time it will take you to pay off those debts.

There are many variations of debt consolidation loans: secured, discounted, credit card and student.

Secured Debt Consolidation Loans

Debt consolidation may either result from rolling a number of unsecured loans into another unsecured loan, but often also involves a secured loan against an asset that serves as collateral, such as a house.

A mortgage is secured against the house and allows a lower interest rate than without it, The risk to the lender is reduced so the interest rate offered is lower.

Discounted Debt Consolidation Loans

Sometimes, debt consolidation companies may discount the amount of the loan. This more often occurs when the debtor is in danger of bankruptcy. The debt consolidator effectively buys the loan at a reduced amount, called a discount.

CAUTION: Consolidation can affect the ability of the debtor to discharge debts in bankruptcy, so the decision to consolidate must be weighed carefully.

Credit Card Debt Consolidation

Debt consolidation is often offered when someone is paying off credit card debt from multiple cards. Credit cards have a much larger interest rate than an unsecured loan from a bank. By consolidating the credit card debt into a bank debt consolidation loan, the bank pays off the credit cards and then you pay off the loans, at a lower interest rate than offered by the credit cards. That means you pay off your debt sooner, and pay less overall.

Student Debt Consolidation

Student loan consolidation refinances multiple loans into one new loan with a new repayment term, monthly payments, and interest rate. This may save you money, if you're already paying back student loans or are in your grace period.

More on Student Loans and Debt Consolidation

BEWARE: some debt consolidation companies can take advantage of your need for debt refinancing and charge very high fees in the debt consolidation loan. When a borrower fears losing their house, they are often willing to pay any allowable fee to complete the debt consolidation. This practice is known as predatory lending.

DON'T leave debt consolidation too late, when you don't have time to shop around. If you find yourself in trouble financially, compare options early, so when the crunch time comes, you know who offers the best deal.

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