Often, personal debt comes from many different sources, all with varying monthly fees and interest rates, and can quickly spiral out of control. A debt consolidation loan is a new loan obtained from a bank or financial company with the sole purpose of paying all your existing smaller debts at once. By combining your multiple debts together, or “consolidating” them, you now have only one monthly payment that fits within your budget.
The truth of the matter is that you aren’t exactly combining your debts, as this isn’t actually possible. Each of your various debts has a different interest rate, payment frequency, and set of repayment terms. What you are doing is taking the total amount of all your debts, taking that amount out in one large loan, and using the loaned money to then pay off each institution you are indebted to. The process of paying off your debt is now centralized into one payment.