Five Debt Consolidation Mistakes

Debt consolidation can be an excellent tool to help you get on top of your debt.

But there are a few things that it’s important to be aware of.

What is debt consolidation?

Debt consolidation refers to the process of rolling two or more debts into one new loan.

You might have credit card debt, hire purchases, store cards or personal loans. That can mean several different payments to keep track of each month, and likely a range of different interest rates being charged.

Debt consolidation means you could have just one repayment to think about and one interest rate.

This can make the debt much easier to manage from a life admin perspective. If your loans are getting overwhelming or you’re having trouble keeping up, simplifying the debt can be a relief.

Sometimes, you may be able to access lower interest rates for your consolidation loan, too, particularly if you have high-interest credit cards or personal loans at present. This can make the loan cheaper in the long run, particularly if you can pay it off over the same or a shorter term as existing loans.

Five common mistakes to avoid

There are a few potential drawbacks that can catch borrowers out. Being aware of them from the outset could help you avoid them.

Failing to budget effectively

Debt consolidation will simplify your debt repayments, but they won’t go away. Creating a monthly budget to ensure that you know where your money is going may help you ensure your payments are made on time.

Not factoring in loan terms and fees

Sometimes, there’s a fee associated with breaking an existing loan to consolidate it into a new one. You may need to weigh up these factors when you decide whether consolidation is right for you.

Not addressing the reason you had a problem with debt

When you’ve consolidated your debt, you may need to look at your spending habits to determine how it became a problem. Were you spending more than you could afford to? Were there unexpected expenses that caught you out? A realistic budget and an emergency fund could help you not need to rely on debt in future. It’s also really important not to use debt consolidation as an opportunity to take on more debt.

Choosing the wrong lender

Lenders have obligations they need to meet, which are designed to ensure that you borrow only an amount you can afford to repay. At better finance™️, we work with reputable loan providers who can offer you fixed interest rates and clear terms.

Over-borrowing

It might be tempting to take out a bigger loan, to allow you to tick off some other purchases at the same time as consolidating your debt. New Zealand’s lending rules mean your lender won’t lend you more than you can demonstrate you can afford to repay – but it’s worth doing your own checks to make sure the lending you’re considering is comfortable for you, too. Over-borrowing can be a cause of financial stress.

Steps to consolidate debt successfully

Here are a few steps you can work through to consolidate your debt.

• Assess your financial situation. What does the current picture look like? Carry out a stock take, looking at your total debt, the interest rates you’re paying and the repayments you have to meet.

• Use better finance™️’s loan repayment calculator to see what a debt consolidation loan might cost you.

• Talk to us about your options. We can help you find a lender who is a good fit for you for a debt consolidation loan. better finance™️'s team of financial advisers are experts when it comes to personal loans and can help you find a loan that’s an appropriate fit for your circumstances.

• Create a repayment plan. Your loan will be set up to be repaid over a set number of months or years. You can use this period to set some financial goals and work towards them – for example, your debt consolidation loan might free up some cashflow to help you set up an emergency fund.    

• Monitor your progress: It may be motivating to keep an eye on how you’re progressing towards paying off your loan. Each month, you should be able to see your total dropping as you get a little closer to being debt-free. It may seem slow at first, but as you go along, the pace will increase. When you’re clear, you’ll be able to celebrate your success – and maybe have some new habits in place to avoid debt becoming a problem again.

If you have any questions about debt consolidation, drop the team at better finance™️ a line. We’re here to help you find lending solutions that are a match for your individual circumstances and situation.