Debt consolidation is the process of combining and merging a debts from different lenders and for different purposes into one debt from one lender that is paid via a single monthly payment based on a single interest rate. There are many reasons why you should consolidate your debts but the bottom line result of all those reasons and the consolidation process is simply lowering your debt cost and lowering the risk of defaulting on a loan.

Debt consolidation takes an advantage of economy of scales. Having one bigger debt rather than a few smaller debts is actually better when it comes to negotiating your debt interest rate. Lenders actually do like to lend money since this is how they are making their profit. When consolidating a few debts the result is having one bigger debt that is thus more lucrative for lenders to facilitate. A bigger debt is more profitable for lenders as it carriers higher interest payments. So having one bigger debt can help in negotiating with potential lenders for lower interest rate and better other terms.

Consolidating debts is a relatively easy process. The first step is to write down all the current debts their terms interest rate and principal balance. Summarize the total balances and then go shop for a lender that would be interested in consolidating all these different debts. The lender would basically pay off all the debts from a credit line opened for the borrower and then collect from the borrower the interest and principal payments for that one consolidated debt.

There are some problems that can prevent debt consolidation or make it less profitable for the borrower. For example some debts include penalties for early payments. In other words if the borrower decides to pay off the debt before the debt termination date the borrower will have to pay the balance principal plus some penalty that can be a fix amount or more likely an amount that decreases as the termination date gets closer. When consolidating debts the potential lender will basically be paying off all the smaller debts and if there are any penalty payments for any of the debts the lender will have to pay those penalties or on other words the borrower will have to also borrow the penalty.

There is also a psychological benefit for consolidating debt. When carrying a few different debts the borrower has to remember to pay all the different payments. Usually each debt will have a different payment date and payment address and maybe even payment method. If you carry five debts for example you will have to remember to pay five debts five times a month some of them might be paid by sending a check while others be paid online. When consolidating debts the end result is having one debt which means one payment a month make it much more simpler and making forgetting to make a payment and being hit with penalties less likely.