With rampant credit crunch being experienced all around due to some bad lending and foreclosure on mortgages rising each day, it's easy to guess what a debt ridden man with no assets would be seeking - unsecured debt consolidation loans. Debt Consolidation, simply put is the act of clubbing together a bunch of bad loans or debts which drain a significant amount of your income each month by way of interest alone, into one single loan which repayment on a steady rate of interest which is usually marginally lower than the average interest paid on the various loans that you have in your name.

Example: The Smith's next door have a run of bad luck and all of the sudden somehow get stuck with $15000 worth of credit card debt, and owe a bank $3000 because they just sold a car that they were upside down in. They are racking up huge payments and fees because credit cards have crazy interest and banks don't like it when you owe them that kind of money without having an official loan in place.

The Smith's don't want to keep paying fees and crazy high interest and the best solution is going to be taking out a debt consolidation loan. This will help them a ton. They are still going to have a lot of debt but the interest they're paying may go down from 18% to 10%. That's going to be a huge different in how much they have to pay to get out of their debts. If they had better credit they could probably get something in the sub-10% range.

This might be a long term low interest loan or a short term high interest one or a secured or unsecured loan, depending on the current credit rating of the debtor and how much risk the lender is willing to take. The chunk of the population that seeks out debt consolidation loans and is willing to be lured by companies which offer such loans is significant owing to the widespread availability and misuse of credit before the downfall in the economy and the credit crunch hit the markets.

These loans offer low interest rates as well as rid you of the worry of meeting individual payments on each separate loan in time. The problem with unsecured debt consolidation loans is that not everyone who is in debt is eligible for one. There are a few factors that are routinely considered by financing companies who give out such loans, which include the credit rating and credit worthiness of the candidate and whether there is collateral or surety on offer such as landed property or a house.

The prime need for the lender is to secure the loan amount with a collateral and thereby reduce the risk that they undertake. Unsecured loans always carry a high rate of interest such as credit card debts which charge exorbitant interest rates as high as 30-40 percent per annum. If you don't meet your payment obligations, the debt that you owe could double, triple or quadruple in quick time.

Securing these unsecured loans gives you breathing space as many lenders offer lower interest rates on secured loans, wherein you pledge house or landed property as collateral. It might provide you with a debt relief but the term of the loan is often quite long and hence the eventual sum that you end up paying towards the loan might be much higher than the original loan amount.

There is also the risk that you might default on your payments or are unable to make your payments owing to an accident or debilitating illness which cuts off your sources of income. In such a case you stand to lose the collateral which you have put up to your creditors.