The basic concept of a Debt Consolidation Loan is . . .

. . . to take out one loan to pay off several others. This is done to secure a lower interest rate, a fixed interest rate or for the convenience of servicing only one loan. Debt consolidation loans can simply transform a number of unsecured loans, like credit cards, into another unsecured loan. Although most often, debt consolidation loans involve a secured loan against an asset that serves as collateral, which is most commonly a home. In this case a mortgage is taken out on the home. Using the home as collateral allows a lower interest rate because by collateralizing, the homeowner agrees to allow foreclosure of the home in order to pay back the loan. Since the risk to the lender is reduced the interest rate offered is lower.

In some cases, debt consolidation lenders can reduce the amount of the loan. When the debtor is in danger of bankruptcy, a debt consolidator can buy the loan at a discount. A frugal consumer in debt can shop around for consolidators who will pass along the best savings. Debt consolidation can affect the ability of the debtor to discharge debts in bankruptcy, so the decision to debt consolidate must be carefully thought out.

Debt consolidation loans are often advisable when someone is paying credit card debt. Credit card debt can carry a much higher interest rate than even an unsecured loan from a bank. Consumers in debt who own 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 payments towards the debt is lower allowing the debt to be paid off sooner, incurring less interest. Many consumers are in credit card debt because they spend more than they make. Should that habit continue, the debt consolidation loan will not benefit them because they will simply increase their unsecured debt all over again.

Consumers in debt who own 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 payments towards the debt is lower allowing the debt to be paid off sooner, incurring less interest. Many consumers are in credit card debt because they spend more than they make. Should that habit continue, the debt consolidation loan will not benefit them because they will simply increase their unsecured debt all over again.

Because of the advantages that debt consolidation loans offer a consumer with high interest debt, companies can take advantage of that benefit by refinancing to charge very high fees in the debt consolidation loan. Quite often these fees represent the state maximum for mortgage fees. Additionally, some unscrupulous companies will knowingly wait until a consumer has backed themselves into a corner and must refinance in order to consolidate and pay off bills that are delinquent. If the consumer does not refinance they may lose their home, so they are willing to pay almost any fee to go through with the debt consolidation. In some cases the situation is that the consumer does not have enough time to shop around for another lender with more competitive fees and may not even know they are available. This is known as predatory lending. The majority of most debt consolidation transactions do not involve predatory lending, but it's something to watch out for nonetheless.