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Concept
Debt consolidation
Summary
Debt consolidation is a form of debt refinancing that entails taking out one loan to pay off many others. This commonly refers to a personal finance process of individuals addressing high consumer debt, but occasionally it can also refer to a country's fiscal approach to consolidate corporate debt or government debt. The process can secure a lower overall interest rate to the entire debt load and provide the convenience of servicing only one loan or debt.
Debt generally refers to money owed by one party, the debtor, to a second party, the creditor. It is generally subject to repayments of principal and interest. Interest is the fee charged by the creditor to the debtor, generally calculated as a percentage of the principal sum per year known as an interest rate and generally paid periodically at intervals, such as monthly. Debt can be secured with collateral or unsecured.
Although there is variation from country to country and even in regions within country, consumer debt is primarily made up of home loans, credit card debt and car loans. Household debt is the consumer debt of the adults in the household plus the mortgage, if applicable. In many countries, especially the United States and the United Kingdom, student loans can be a significant portion of debt but are usually regulated differently than other debt. The overall debt can reach the point where a debtor is in danger of bankruptcy, insolvency, or other fiscal emergency. Options available to overburdened debtors include credit counseling and personal bankruptcy.
Other consumer options include:
debt settlement, where an individual's debt is negotiated to a lesser interest rate or principal with the creditors to lessen the overall burden;
debt relief, where part or whole of an individual debt is forgiven; and
debt consolidation, where the individual is able to acquit the current debts by taking out a new loan.
Sometimes the solution includes some of each of these tactics.
Debt consolidation calculation involves assessing the potential savings and benefits of combining multiple debts into a single loan or credit line.
Official source
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