Debt consolidation involves taking out a lower interest loan to pay off many others but more often it involves a secured loan against an asset that serves as collateral, which is most commonly a house or fixed asset (a mortgage is secured against the house.) The mortgage loan allows for a lower interest rate than without it, because by taking out the mortgage, the risk to the lender is reduced therefore allowing for a lower interest rate. Consequently, the asset owner agrees to allow the forced sale (foreclosure) of the asset to pay back the loan.

• The replacement of multiple loans with a single loan, often with a lower monthly payment and a longer repayment period.
• As opposed to paying off several separate bills each month (mostly with higher interests), a consumer can consolidate his or her debts with a financial institution or debt consolidation company that will arrange for one lower monthly payment extending over a fixed period of time.

Debt consolidation is often advisable in theory when someone is paying credit card debts that carry very high interest rates than even an unsecured loan from a bank. Debtors can use their property as collateral to secure loans. As a result, the total interest and the total cash flow paid towards the debt is reduced allowing the debt to be paid off sooner with less interest accrued. In reality, majority of Americans are in credit card debt because they spend more than their income. If that habit continues, the consolidation will not benefit them much because they will simply increase their credit card balances again.