Loans for Debt Consolidation Definition

Loans are often made for the purposes of debt consolidation. In a common scenario, a person holds several debt accounts such as credit cards, medical bills, utility bills, and so forth. In order to better manage debt repayment, the person takes out a debt consolidation loan for the full amount of the aggregate debt and uses the borrowed funds to pay off all of the other outstanding debts. Thus, the person has consolidated all their debt into a single loan. They still, of course, have the same amount of debt-but it’s easier to manage and probably has a lower interest rate.

There are two drawbacks, however. First, debt consolidation loans are almost always secured loans while the debts they pay off are almost always unsecured loans; thus, debt consolidation converts unsecured debt into secured debt. Second, many studies have shown that most people using debt consolidation loans quickly return to their old ways and rapidly accumulate additional small debts. Thus, unless debt consolidation is coupled with behavioral modification it rarely leads to debt elimination.