It may arise as from a few unsecured loans into another separate unsecured loan, but most commonly against an asset which can serve the purpose of collateral it acts like a security. In most cases this asset is a house, and against this a mortgage is secured. By implementing the concept of collateral the interest rate is quite significantly lowered, because here in this case the owner of the asset has to agree to sell away or part with his or her assets on the failure to repay back the loan.
Naturally the risk involved for the lender is reduced as this concept ensures no loss on his part after lending the money, so as a result the interest level is lowered.
Now a debt consolidation company or service can also aim at providing a discount to the loan amount. When the person who has taken the debt is almost on the verge of bankruptcy the debt consolidation company will buy his loan at this discount.
A wise debtor can go along looking for consolidators who may pass or transfer along part of the savings. The decision to consolidate should be contemplated and judged perfectly as it enables the debtor to get discharged during his period of bankruptcy.
In case of credit cards, you will notice that the interest rates are even higher than the unsecured loans for which reason debt consolidation in theory is frequently advised when paying through credit cards.
Laws pertaining to debt consolidation are quite different in each country. In U.S.A. Federal student loan is guaranteed and ensured by the government. This is not the case in U.K...
This is quite a relief in most cases but then the negative sides of a consolidation scheme can not be overlooked. Many people are actually tempted to use these schemes and convert their unsecured debts to secured debts. They do not mind the total repayment figure during the whole period as long as their monthly payment amount is low.
Thus the problem with a debt consolidation service is that it aims at addressing and providing solutions to the symptoms that originate as a result of a debt, but it does not attack the root problems that cause these symptoms.
But again there are other options where by opting for a debt consolidation service, it does not mean the shifting of the unsecured loan to a secured loan state. This is usually achieved through a settlement or repayment plan.
