The purpose of debt consolidation is to take all of your debts and put them into one easy payment generally at a lower interest rate than your current interest rates.
The type of debts eligible and loans vary. For instance, you can take your current unsecured loans and pay them off using another unsecured loan. However, debt consolidation generally involves a secured loan against an asset that serves as collateral e.g. a house or a car. If a house is used then a mortgage is secured against the house. Secured loans typically offer lower interest rates because it lowers the risk of a default and protects the creditor in such a case.
An ideal situation for debt consolidation is if you have a lot of high-interest credit card debt. Many times you can get a much lower rate by taking out a secured loan to cover the credit card debts. This way you spend less time and money paying on interest and more on paying down the principal.
Disadvantages
Debt consolidation has its fair share of negatives. Whether you are behind on your payments or not, this is reported to the credit agencies, as you were not able to handle your own affairs and it will dramatically affect your credit worthiness. This also has a 7 to 10 year effect on your credit and does not save you much if any money. Additionally, many of the consolidation firms are nothing more than another name for credit card companies to disguise their attempts to collect.
