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Debt Consolidation
Definition
Debt consolidation combines multiple debts into a single loan with one monthly payment, ideally at a lower interest rate.
Explanation
Debt consolidation can simplify repayment and reduce interest costs. Options include personal loans, balance transfer credit cards, home equity loans, and debt management programs. The key is securing a lower interest rate than the weighted average of existing debts.
Consolidation doesn't eliminate debt — it restructures it. Without addressing spending habits, consolidation can lead to accumulating more debt while still paying off the consolidated loan.
Example
Consolidating $10,000 in credit card debt at 22% into a personal loan at 9% saves approximately $650 per year in interest.