Debt consolidation loan - the process of combining all outstanding debts in one loan account. For example, you may have an existing loan with a balance of $2,500, a card balance of $1,000 and a store card balance of $500. These could all be consolidated into one loan of $4,000. The purpose is usually to lower monthly repayments, through either lower interest rates on the new loan, or lower repayments from an extended repayment term, or both.

Your "fixed monthly consolidated payment" is calculated according to the lowest payment amount accepted by your creditors. The agency you hire will distribute the amount of your "fixed monthly consolidated payment" to each creditor. Most creditors will only reduce or stop your interest fees if their minimum payment is met, but if so, the interest rate reduction with these programs can range from no change to the freezing of interest depending on the creditors policy. This can save you thousands because rates that are usually 12%-24% can get reduced to 10%, 8%, 6% or 0%.

Usually upon entering a debt management or debt consolidation program you would have to close your card debt accounts (as well as others). This is a benefit because it will help curb your current spending and it's probably what method caused your debt originally. Sometimes you'll find that you can still own one or two cards for emergency or if it's "secured".
 

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