Debt Consolidation Loan

Debt Consolidation Loan is a part of the Debt Consolidation. Debt Consolidation loans are freely available in the market. Debt Consolidation is also commonly known as Consolidation Loan.

Definition: Debt Consolidation Loan -

- Wikipedia: Debt consolidation entails taking out one loan to pay off many others. This is often done to secure a lower interest rate, secure a fixed interest rate or for the convenience of servicing only one loan.

Debt consolidation can simply be from a number of unsecured loans into another unsecured loan, but more often it involves a secured loan against an asset that serves as collateral, most commonly a house. In this case, a mortgage is secured against the house. The collateralization of the loan allows a lower interest rate than without it, because by collateralizing, the asset owner agrees to allow the forced sale (foreclosure) of the asset to pay back the loan. The risk to the lender is reduced so the interest rate offered is lower.

- Investopedia: The act of combining several loans or liabilities into one loan. Debt consolidation involves taking out a new loan to pay off a number of other debts. Most people who consolidate their debt usually do it to attain a lower interest rate, or the simplicity of a single loan.
Also known as a "consolidation loan".

Explanation:

Debt consolidation is often advisable in theory when someone is paying credit card debt. Credit cards can carry a much larger interest rate than even an unsecured loan from a bank. Debtors with property such as a home or car may get a lower rate through a secured loan using their property as collateral. Then the total interest and the total cash flow paid towards the debt is lower allowing the debt to be paid off sooner, incurring less interest.

Theoretically the idea and logic behind the Debt Consolidation Loan is to convert your several high interest unsecured loans into a Single low interest loan by putting your some Asset as a Collateral usually your Home.

The Maths Behind Debt Consolidation is really good and logical. if you are in a Debt of several Credit Cards and personal loans at the annual interest rate of 35-50% than it is advisable to go for Debt Consolidation means taking a Consolidation Loan against your Home (Commonly) & paying all of your other Debts and after that you can pay your low interest rate Consolidation Loan (Usually 6-10%).

Finance Gurus Say that, Debt Consolidation won’t work for you even  if the Maths behind it works because you haven’t change your (Financial) behaviour.

People go for Debt Consolidation Loan to free up their Credit Card Credit Limits & start paying their Consolidation Loans but they haven’t change their bad financial spending habits. So they again start scratching their credit cards. And the result is, After few months they are in 2 Debts – One is a Debt Consolidation Loan that they have already taken by putting their home as a Collateral and another is their Credit Card Debt.

So At the end, Debt Consolidation don’t work for people even if the Maths behind it works because people don’t want to change their bad financial spending habits.