Debt consolidation is the process of replacing a number of expensive, high-interest debts with one loan at a favorable rate. By reducing the interest rate as well as the number of loans, the consumer has the chance to repay debt faster than before.

The advertisements on television and radio appear to be ubiquitous, suggesting that if you owe too much money, you just need debt consolidation to end your financial troubles. Getting out of financial trouble is more involved than simply borrowing money, as you actually have to pay back your debt to get out of trouble. The right debt consolidation loan can make it easier to repay bills, as you will have only one payment each month, but the wrong loan can actually cost you more.

There are two ways to obtain funds to consolidate your debt; each has benefits and drawbacks. An unsecured loan can be used to retire debt and a secured loan, which makes use of collateral, can be used as well.

A secured loan is almost certainly the most frequently used financial tool to combine bills, using collateral that offers a bit of a guarantee to the lender that you will repay. The most frequently used forms of security are homes and vehicles; it's easy to establish a value for them and they can sell easily should you default on your payments. As a benefit for providing collateral, you do receive a couple of positives - you can almost certainly obtain more money than you can with unsecured financing, and the interest rate that you pay will almost certainly be cheaper.

An unsecured loan needs no collateral; the financial institution just lends you the money in exchange for a promise to pay it back. Unsecured borrowing comes with a cost, as the rates tend to be substantially higher than for secured lending. An unsecured loan can be much harder to get than a secured one, particularly if your credit score is poor. An advantage for the borrower would be that there is no added risk of forfeiting property, such as a car or a home, should he default on the loan.

The promise of security to the bank or a credit union goes a long way towards receiving a favorable interest rate. Borrowers can get the best deal by applying for secured financing. For the large majority of consumers, secured lending generates the best financial leverage towards retiring a heap of financial obligations. As the interest rates are higher, trying to consolidate debt with more unsecured debt might leave the borrower simply treading water. If you are not sure as to what might work best for you, talk to a lender.