debt consolidation
The process of combining multiple debts into a single loan with one monthly payment, ideally at a lower interest rate.
Example
“She consolidated five credit card balances totaling $20,000 into one personal loan at 9% APR.”
Memory Tip
CONSOLIDATION = combining everything into ONE. Many debts, one payment.
Why It Matters
Debt consolidation can significantly reduce your monthly financial burden by lowering your overall interest rate and simplifying payments. Understanding this strategy helps you make informed decisions about managing multiple debts and can free up cash flow for other financial goals or emergencies.
Common Misconception
Many people believe that debt consolidation eliminates their debt, but it actually just reorganizes existing debt into a new structure. You still owe the same total amount of money, though you may pay less interest over time depending on the new loan terms.
In Practice
Suppose you have three credit cards with balances of 5000 dollars, 3000 dollars, and 2000 dollars, each charging 18 percent interest monthly. You could consolidate these into a single personal loan for 10000 dollars at 10 percent interest, reducing your total interest payments from approximately 2700 dollars over five years to around 1500 dollars while making just one payment per month.
Etymology
From Latin 'consolidare' (to make solid, compact) — making many debts into one SOLID loan.
Common Misspellings
Compare debt consolidation options
Related Terms
More in debt
Other debt terms you should know
See Also
Need financial definitions?
Clear definitions for 2,500+ finance, insurance, and investing terms.