When one has trouble meeting their existing obligations and is able to lower their monthly payment with another more favorable loan, debt consolidation comes in handy. Debt consolidation refers to a new loan formulation with a lower rate of return.

This process saves of being one unable to pay off their loans can turn into a bad debt for the loan offering agencies. Hence, they lower the rate of interest so that a debt des not turn into a bad debt and the loan is ultimately paid although the tenure gets longer.

In other terms, consolidation is a process in which companies or people with credit problems ( huge credit) combine all their debts into one loan to create greater ease in repayment, or lower the payment in totality(credit cards, car loans, student loans, etc).

The Debt

Debt is an amount that one has to pay back to the loaning agency. Thus debt is some amount or obligation that has to be paid back usually with some interest. The company or person owing debt is termed as debtor while the lender is termed as creditor.

Types of debt

Basic loans, syndicated loans, bonds, and promissory notes etc all are forms of debt. Large sum d debts are usually are secured or are backed by a mortgage. A mortgage may be some property that is shown as a security to the debt so that in case the debtor is unable to repay the debt the property can be used instead of the loan by the creditor, to recover the debt amount.

Bad debt

According to US accounting practices, after every accounting cycle the unrecoverable receivables are written off (discarded) as an expense from Allowance for Doubtful Accounts to the account called Bad Debt Expense. In simple terms it is the expense of the creditor that is unrecoverable.

Bad debt consolidation

Now, a credit agency or lender would always want to minimize the risk of return and when the debtor is unable to pay the interest amount, due to shortage of cash, the debtor must try to recover the money by reducing the interest rate. This enables the debtor to pay back the loan according to own preferences.

However, the process is not that simple. The inability to pay the loans usually arise due t the burden of many loans which the debtor takes up one after the other, in a desperate try to manage increasing loans.

in handy. Debt consolidation converts all the loans into one loan. Consolidation is usually done to secure a lower interest rate, secure a fixed interest rate or merely, for the convenience of servicing only one loan.

in handy. Debt consolidation can be offered against a secured loan against an asset that serves as collateral. In most common cases its a house where a mortgage is secured against the house. Due t mortgage, the debtor agrees t foreclosure or forced sale of the assets and hence risk is minimized. So, the creditor accepts a lower interest rate.

The debt consolidator usually buys the debt and offers the debtor a lower interest rate. However, the consolidation may lead to affects in debt payment process of the debtor. Hence the debtor should invariably judge before deciding to consolidate.

Credit cards which have higher interest rate than a debt can be paid through consolidation. Usually, Credit cards carry larger interest rates than the unsecured loans taken from a bank. Debtors who can provide collateral, those who have property such as a house or a car, can opt for a secured loan against the mortgage of the property. Since the loan is paid back sooner, the interest rate applied is less and hence a lower interest rate to the debt can be applied.

People with a shopping spree with credit cards can be good for some warning, here. In practice, these people are in debt because they spend more than their income and as the habit goes on, the consolidations will not offer much benefit to them. That is party true because the credit card balances will soar again as they incur more expenses through it. It is almost like taking new debts everyday when one is unable to pay a bigger debt incurred earlier. Thus it is advantageous in some cases for the debtor to opt for a new smaller interest rate than paying huge sums.

Warning: Predatory lending

Predatory lending is an unethical lending practice that takes advantage of vulnerable borrowers, who are in a bankrupt situation and are elderly or illiterate (unsophisticated). Predatory lending may also include convincing debtors to agree to an unfair or expensive loan term. In case of a bad debt condition arousing the unscrupulous people might take advantage of the borrowers situation and abuse the borrower financially.

Predatory lending loans can operate through outright deception or through aggressive sales tactics, taking advantage of borrowers' lack of understanding of extremely complicated transactions and inability to gauge the interest-increase in the long term.

As discussed above predatory lending may be offered by paying a secured loan for the borrower, such as home or car loans, with an expectation that the borrower will be unable to pay the loan (i.e. default),. Therefore the lender of the predatory loan can acquire the ownership of the mortgage (car, home or land etc).

In some cases the borrower is charged 50% or even 75% interests and the borrower remains unaware of the fact since it is distributed uniformly and tactfully. However, sometimes it is done knowingly. These are unscrupulous practices and borrowers should abstain from such loans.