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Debt consolidation entails taking out one loan in order to be able to pay off other loans. This is usually done in order to secure an interest rate that is much lower than what you are currently paying for.

This kind of loan can either be in the form of unsecured and secured loans. However, debt consolidation oftentimes involves a secured loan which means you have to use a collateral such as a house or a car in order to get a loan approval.

If you avail of a secured loan using your house as a collateral, then you need to secure a mortgage for your house. The good thing about opting for a secured loan is that your interest rates will be much lower as compared to an unsecured loan. However, you also need to keep in mind that in case you default on your payments, your asset will be taken away from you to pay off your debt. Because the lender has a fall back in the form of your asset, this explains why secured loans are given lowered rates.

There are times, however, when debt consolidation companies give a discount for the total amount of your bad credit loans. When you are nearing bankruptcy, the consolidator usually ends up buying the loan at a huge discount. A prudent debtor can go around trying to find the best consolidator who will agree to pass along a huge part of the savings.