Examples of Consolidation

Consolidation refers to combining items. If you take a sock collection that is spread over three drawers and a corner of your closet, and put all of your socks in one bin, you've consolidated them. Frequently, the term is used in business and economics to refer to putting companies or debts together into a single, larger entity or loan.

You can frequently consolidate your federal student loans into a single large loan and may also be able to take out a separate private consolidation loan for your private student loans. Taking out a consolidation loan lets you make a single payment. It may also reduce your payments and let you spread your loan out over time. Sometimes, a consolidation loan can lower your interest rate as well. On the other hand, if you pay your interest over a longer time, you could end up spending more in total even if you spend less every month.

If you get an offer for a low-interest-rate credit card, you might be tempted to transfer the balances from your other cards to the low-rate card. This type of consolidation can save you a lot of money if you significantly lower your rate. However, you aren't getting out of debt when you consolidate -- you're just moving the debt around to make it easier to pay off. As such, you might want to avoid running the credit cards that you paid off back up or you could end up with twice the debt you originally had.

You can also take out a consolidation loan that you can use to pay off credit cards or other debts and roll them into a single loan. Some loans are personal loans that aren't secured by anything other than your promise to pay. If you have a house with equity, which is value that isn't tied up by a loan, you can also borrow against the equity and take out a home equity loan for consolidation. Sometimes, the interest on these loans is tax deductible.

Companies can merge, or consolidate, as well. For instance, your favorite coffee shop could consolidate with your friend's favorite tea shop. That way, the company is guaranteed to profit regardless of which hot beverage you drink. If two health clubs are competing with each other on price, they could merge together into a single company with a single price that may be higher. Sometimes, companies consolidate because one wants the other's products for its line of products, as well.