Debt Consolidation

Definition - What does Debt Consolidation mean?

Debt consolidation is when a debtor takes out a new loan and uses that loan to pay off several existing loans. This is typically done because the borrower may have an easier time repaying the new loan due to lower interest rates, lower monthly payments and/or a simpler repayment process.

In the context of the law, debtors who go through debt consolidation become legally obligated to repay the new loan. The obligation to repay the old ones will be finished once the money from the new loan is used to pay them.

Justipedia explains Debt Consolidation

Debt can be a large burden to borrowers. Student loan debt, car loan debt, credit card debt and others can all be difficult to pay back. This is especially true if a borrower does not have many assets or a high income. So, debt consolidation is often used as a strategy by debtors to make paying back debt easier.

A person who defaults on debt can have their assets legally seized or wages garnished in order to repay the creditor. Credit scores can also be dramatically affected. For these reasons, many people consolidate their debt in order to prevent these problems from happening.

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