A debt consolidation loan is typically a new loan taken out to pay off existing debts. In many of these cases it involves getting a secured loan by offering property (e.g. house) as collateral. This process is usually undertaken to secure lower interest rates or to get a fixed interest rate with a longer period for repayment.
Debt consolidation loans are mostly used when paying on credit card debts. Credit cards normally have higher interest rates attached. As such, many will choose to pay off their debts in a lump sum while making just one monthly payment on their loan at a lower interest rate.
Student loans can also be considered for debt consolidation loans. In many cases students will combine their loans and consolidate at a fixed rate. This allows the student to be locked in without incurring any additional fees.
Lastly it provides the convenience of making fewer monthly payments.
However, one must also consider the damaging aspects of debt consolidating loans. When converting an unsecured loan into a secured loan borrowers normally put up their home as collateral. If they should encounter financial hardships though and in turn fail to make their payments they may loose the house whereas in unsecured loans the only thing at stake is your credit rating.
It might also encourage new debt. Many fall victim to the erroneous belief that since they are only making one monthly payment they can go ahead and incur new debts.
