Debt Consolidation Definition

Debt consolidation refers to a variety of methods used to take multiple debts and combine them into a single debt. This is usually done for reasons of convenience, but can also be a sensible financial move if, for example, the single consolidated debt has a lower interest rate than the multiple debts being consolidated. The classic example of debt consolidation involves a person with a primary mortgage, a "second" mortgage, an automobile payment, and numerous credit card debts, performing a home refinance to combine the old home mortgages, the outstanding automobile debt, and all the credit card debt into a single home mortgage.

Debt consolidation makes debt management easier, but it also generally converts unsecured debt into secured debt, and often secures the debt against a house. Numerous studies have shown that, strangely, debt consolidation rarely leads people out of debt. Apparently, the psychological freedom experienced by having only a single debt ironically results in spending sprees. In short, to be an effective debt reduction method, debt consolidation must be coupled with adherence to a budget and behavioral modification.