Debt consolidation would enable you to take out one loan to pay off many others to give you relief. This is done often so you can secure a fixed interest rate, secure a lower interest rates or for the convenience of servicing only one loan.
You can use Debt consolidation to simply be a number of unsecured loans rolled into another unsecured loan, but more often it involves a secured loan that would be use against an asset that serves as collateral, this is most commonly a house that you own. A mortgage is security used against the house. The risk to the lender is reduced so the interest rate offered is lower by using the collateralization of the loan. This allows a lower interest rate, because by collateralizing, the asset owner agrees to allow the forced sale or foreclosure of the asset to pay back the loan.
A lot of times debt consolidation companies can discount the amount of the loan. When the debtor is close to bankruptcy, the debt consolidator will buy the loan at a discount. A wise debtor can shop around for consolidators who will pass along alot of the savings. Consolidation can be affected by insuring the ability of the debtor to discharge debts in bankruptcy, so the decision to consolidate must be weighed very carefully.
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Debt consolidation is often advisable in theory when someone is paying credit card debt. Credit cards can carry a much larger interest rate than even an unsecured loan from a bank. Debtors with property such as a home or car may get a lower rate through a secured loan using their property as collateral. Then the total interest and the total cash flow paid towards the debt is lower allowing the debt to be paid off sooner, incurring less interest. In practice, many people 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.
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