Legal Definitions - debt consolidation

Definition: Debt consolidation, also known as debt pooling, is an arrangement where a person's debts are combined into one loan. Creditors agree to accept lower monthly payments or to take less money.

Example: John has three credit cards with different balances and interest rates. He decides to take out a debt consolidation loan to pay off all three credit cards. The loan has a lower interest rate than the credit cards, and John only has to make one monthly payment instead of three.

Explanation: In this example, John's debts are consolidated into one loan, which simplifies his payments and reduces his interest rate. The creditors agree to accept the loan payment instead of the individual credit card payments. This arrangement helps John manage his debt more effectively.