Editing Debt consolidation

{{Short description|Form of debt refinancing}}
{{Personal finance}}
'''Debt consolidation''' is a form of debt [[refinancing]] that entails taking out one [[loan]] to pay off many others.<ref name=Investopia>{{cite news|last1=Fontinelle|first1=Amy|title=Alternatives To Balance Transfers|url=http://www.investopedia.com/articles/personal-finance/112614/alternatives-balance-transfers.asp|access-date=21 December 2014|work=Investopia|date=November 26, 2014}}</ref> 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 policy|fiscal]] approach to consolidate [[debt|corporate debt]] or [[government debt]].<ref name=china>{{cite news|last1=Global risk insights|title=China's Interest Rate Cut Not as Reformist As It Seems|url=http://seekingalpha.com/article/2770105-chinas-interest-rate-cut-not-as-reformist-as-it-seems|access-date=21 December 2014|work=Seeking Alpha|date=December 20, 2014}}</ref> 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.<ref name="Ryan2011">{{cite book|author=Joan Ryan|title=Personal Financial Literacy|url=https://books.google.com/books?id=zdWrPiSGXY4C&pg=PA292|access-date=13 December 2011|date=14 January 2011|publisher=Cengage Learning|isbn=978-0-8400-5829-4|pages=292–}}</ref> Debt consolidation is sometimes offered by [[loan sharks]],<ref>{{Cite web |title=Debt consolidation |url=https://nationaldebtline.org/get-information/guides/debt-consolidation-ew/ |access-date=2024-08-27 |website=www.nationaldebtline.org |language=en-GB}}</ref> charging clients exorbitant interest rates.<ref>{{Cite web |title=Loan shark debt |url=https://www.stepchange.org/debt-info/owing-money-to-loan-sharks.aspx |access-date=2024-08-27 |website=www.stepchange.org |language=en-GB}}</ref> Further regulation has been discussed as a result.<ref>{{Cite web |title=Long-Term Debt Requirements for Large Bank Holding Companies, Certain Intermediate Holding Companies of Foreign Banking Organizations, and Large Insured Depository Institutions |url=https://www.federalregister.gov/documents/2023/09/19/2023-19265/long-term-debt-requirements-for-large-bank-holding-companies-certain-intermediate-holding-companies |access-date=2024-08-27 |website=www.federalregister.gov |date=19 September 2023 |language=en-US}}</ref><ref>{{Cite web |title=Code of Federal Regulations |url=https://fiscal.treasury.gov/debt-management/legal-authorities/code-of-federal-regulations.html |access-date=2024-08-27 |website=www.fiscal.treasury.gov |language=en-US}}</ref><ref>{{Cite web |title=Agencies request comment on proposed rule to require large banks to maintain long-term debt to improve financial stability and resolution |url=https://www.federalreserve.gov/newsevents/pressreleases/bcreg20230829a.htm |access-date=2024-08-27 |website=www.federalreserve.gov |language=en-US}}</ref>

==Overview==
{{Further|Consumer 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 (finance)|principal]] and interest.<ref>{{cite web|url=http://www.investopedia.com/terms/d/debt.asp|title=Debt Definition|publisher=Investopedia|access-date=16 May 2012}}</ref> [[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 loan|secured]] with [[collateral (finance)|collateral]] or [[Unsecured debt|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 finance|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 loan]]s can be a significant portion of debt but are usually regulated differently than other debt.<ref name=Studentloands>{{cite news|last1=Rowan|first1=Rachel|title=Student Loans Around the Globe|url=https://www.tuition.io/blog/2013/06/student-loans-around-the-globe/|access-date=21 December 2014|work=Tuition.io - Student Loan|date=June 7, 2013|archive-date=21 December 2016|archive-url=https://web.archive.org/web/20161221084959/https://www.tuition.io/blog/2013/06/student-loans-around-the-globe/|url-status=dead}}</ref> The overall debt can reach the point where a debtor is in danger of [[bankruptcy]], [[insolvency]], or other fiscal emergency.<ref name="VittMacBean2003">{{cite book|author1=Lois A. Vitt|author2=E. Craig MacBean|author3=Jürg K. Siegenthaler|author4=Institute for Socio-Financial Studies|title=Encyclopedia of Retirement and Finance|url=https://books.google.com/books?id=lc3zy80-h_AC&pg=PA37|access-date=13 December 2011|date=30 November 2003|publisher=Greenwood Publishing Group|isbn=978-0-313-32834-3|pages=37–}}</ref> 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]].<ref>{{cite web|url=https://samedayloans365.org/guides/how-does-debt-consolidation-work-dos-and-donts/|title=How Does Debt Consolidation Work: Do's and Don'ts|publisher=SDL365 Financial Choice|access-date=18 June 2019}}</ref>
Sometimes the solution includes some of each of these tactics.<ref name=FTC>{{cite web|last1=Staff writer|title=Coping with Debt|url=http://www.consumer.ftc.gov/articles/0150-coping-debt|website=FEDERAL TRADE COMMISSION|publisher=US Government|access-date=21 December 2014}}</ref>

===Process===
The bulk of the consumer debt, especially that with a high interest, is repaid by a new loan. Most debt consolidation loans are offered from [[Financial institution|lending institutions]] and secured as a [[second mortgage]] or [[home equity line of credit]].<ref name=FTC /> These require the individual to put up a home as [[collateral (finance)|collateral]] and the loan to be less than the [[equity (finance)|equity]] available.

The overall lower interest rate is an advantage that debt consolidation loan offers to consumers. Lenders have fixed costs to process payments and repayment can spread out over a larger period. However, such consolidation loans have costs: fees, interest, and "points" where one point equals to one percent of the amount borrowed. In some countries, these loans may provide certain tax advantages.<ref name=Foxtaxbreaks>{{cite news|last1=Detweiller|first1=Gerri|title=Congress Extends Tax Break for Troubled Homeowners, But Headaches Aren't Over|url=http://www.foxbusiness.com/personal-finance/2014/12/18/congress-extends-tax-break-for-troubled-homeowners-but-headaches-arent-over/|access-date=21 December 2014|work=Fox Business News|date=December 14, 2014}}</ref> Because they are secured, a lender can attempt to seize property if the borrower goes into [[default (finance)|default]].

Personal loans comprise another form of debt consolidation loan. Individuals can issue debtors a [[personal loan]] that satisfies the outstanding debt and creates a new one on their own terms. These loans, often unsecured, are based on the personal relationship rather than collateral.

In United States, there are certain companies and private law firms addressed as debt relief companies and/or debt consolidation companies that provide professional debt consolidation services. A consumer can approach them for debt help and make only one monthly payment to them. This payment will then be disbursed by these companies among the various creditors the consumer is indebted to.
Many other countries, alongside the United States, also have such professional services for the benefit of consumers struggling with [[household debt]]. {{citation needed|date=April 2019}}

==Student loan consolidation==
In the United States, [[student loan]]s which are part of the [[Federal Direct Student Loan Program]] are consolidated somewhat differently from in the UK, as federal student loans are guaranteed by the U.S. government.

===United States===
In a [[federal student loan consolidation]], a weighted average interest rate is assigned to the consolidation loan, rounded up to the nearest eighth. Federal student loan consolidation is sometimes incorrectly referred to as refinancing. Unlike some private sector debt consolidation, student loan consolidation does not incur any fees for the borrower.<ref>{{cite web |title=Should I consolidate or refinance my student loans? |url=https://www.consumerfinance.gov/ask-cfpb/should-i-consolidate-refinance-student-loans-en-561/ |website=Consumer Financial Protection Bureau |access-date=25 November 2023}}</ref>

===United Kingdom===
In the UK [[student loan]] entitlements are guaranteed, and are recovered using a means-tested system from the student's future income. Student loans in the UK can not be included in [[bankruptcy]], but do not affect a person's [[credit rating]] because the repayments are deducted from salary at source by employers, similar to [[income tax]] and [[National Insurance]] contributions. Many students, however, struggle with commercial debt well after their courses have finished.<ref>{{cite web|url=http://creditaction.org.uk/assets/PDF/statistics/2011/august-2011.pdf|title=Debt Facts and Figures - Compiled August 2011|date=August 2011|publisher=creditaction.org.uk|access-date=10 May 2012}}</ref>

===Australia===
Australia's student loan system once allowed 35 years to pay back loans, but currently allows 15. Those seriously delinquent on student loans face arrest at the border.<ref name=Studentloands />

===Japan===
In Japan, an increasing number of student loans are in arrears. In response, the nation is taking harsher steps when it comes to lending determinations. In an effort to prevent future defaults, Japan has begun associating loan approvals to academic performance.<ref name=Studentloands />

==See also==
* [[List of accounting topics]]
* [[Debt management plan]]

==References==
{{Reflist|30em}}

==External links==
* [https://web.archive.org/web/20050913175136/http://www.loanconsolidation.ed.gov/ Federal Direct Consolidation Loans Information Center of the U.S. Government]
* [https://studentaid.gov/help-center/answers/article/federal-direct-loan-program William D. Ford Federal Direct Loan Program]

{{Debt}}
{{Authority control}}

[[Category:Debt|Consolidation]]
[[Category:Credit]]
[[Category:Insolvency]]