A loan issued by a bank or other financial institution used to pay off existing debts. The idea is to save money in the long run by reducing interest paid. Also useful for closing credit card accounts.

Warning: When websearching for information on debt consolidation, many of the hits will be companies trying to convince you that they are the best choice for a loan.

First, investigate your options with a nonprofit group such as American Consumer Credit Counseling, available at:

In the UK, debt consolidation loans have a slightly different aim. (OK, so the real aim is to make the lending company a profit, but we'll overlook that!)

The first thing to realise is that to get a loan from a bank, you have to prove that you don't really need it. Hence the sort of companies that offer debt consolidation loans are lending to people who may not have perfect credit histories, or may have other money problems. This is, of course, a higher risk, so they are justified in charging a higher rate of interest than banks.

But the key point in the way these companies work, is that they don't specifically aim to reduce the total amount you pay - they aim to reduce your monthly repayments, therefore making them more affordable. This is usually done by increasing the duration of the loan.

Let's say you owe, on various credit cards, a total of £10,000, with an annual interest rate of 18%. You have to pay off a monthly minimum of 5% every month under normal terms, which equates to £500 and you may not be able to afford this.

By taking out a loan for £10,000 from one of these companies, you can pay off the credit card debt immediately. And by taking out the loan over a period of, say, 10 years, you can reduce the monthly payments to about £150, and even the interest rate may be lower (often under 10%). But as you're paying off less each month, the interest has much longer to build up, and you do end up paying significantly more in the long run.

By comparison, if you were to pay this loan off directly to the credit card company, at £500 / month at 18% interest, you'd pay the loan off in a total of about 2 years and would pay a total amount of about £11,650. The total amount paid over 10 years (even at 8.9%, one of the lowest rates offered by a debt consolidation company), would be nearly £15,000. And, in addition, these loans are often secured on your property so "Your home is at risk if you do not keep up repayments on a mortgage or other loan secured on it".

In the past, there have been a lot of scandals concerning these companies charging penalties and/or extortionate interest rates for people missing even one repayment. However, now, the business is much more regulated, and there are a large number of reputable companies offering these services to people who - for any reason - need money, but can't get a loan from a bank.

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