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Ever feel as though the life admin of managing your debt is getting a bit much?
If keeping track of what needs to be paid when is getting a bit hectic, you might have wondered whether debt consolidation is a good idea.
When you opt for debt consolidation, you roll a number of smaller debts into one, single loan. That means one payment to manage, one interest rate to think about and one balance to pay off.
Here is what New Zealand borrowers need to know if they are considering debt consolidation.
What is debt consolidation?
Sometimes, when you have a few different debts, it can be tricky to keep track of them. Some might be being paid monthly, some weekly – and they might all have different terms and be charging different fees and interest rates.
Debt consolidation means instead of needing to remember to pay your credit card, your personal loan and your hire purchase each month, for example, you only have to tick off one payment, and you’re done.
This can be a lot easier to manage, and take some of the stress out of paying down the debt. It can also make it easier to keep an eye on what you owe, helping you work towards bringing the balance down to zero.
How debt consolidation loans work?
If you do decide debt consolidation is the right option for you, you’ll start the process by applying for a loan.
There are a number of lenders that provide debt consolidation loans in New Zealand. Typically the process starts with providing information about the debts you want to consolidate (for example credit card debt, hire-purchases, store card loans and personal loans) as well as personal information such as proof of your income and your identification documents.
The team at better finance™️ are expert at helping Kiwis work through their debt consolidation needs and options. If you’re looking for help, just get in touch.
Are debt consolidation loans a good idea?
Debt consolidation loans can be a good idea in lots of cases. Here are a few of the common reasons.
Lower interest rates
If you have high-interest debt, such as on a credit card or from a short-term lender, you may be able to access lower interest rates with debt consolidation. Depending on the term of the proposed new loan, this may save you money.
A single repayment is easier to manage
When you’re thinking about your household budget, it’s often easier to plan for one debt repayment rather than juggling multiple.
Reduce your financial stress
If there’s a risk that your debt could get on top of you, debt consolidation gives you a chance to get it under control. If you can access a lower interest rates or opt for a longer loan term, it could reduce the repayment amount. Alternatively, you might be able to take the opportunity to pay all your debt off more quickly.
But there can be some situations where debt consolidation is not right.
Here are a couple to keep in mind.
High fees or penalties
Sometimes you may be stung with a penalty or fee to pay off a loan early if you are trying to consolidate it. In those circumstances, it is worth considering whether the amount you’ll save by consolidating the loan is worth the fee. The debt consolidation loan provider may also charge fees. Before you begin, make sure you get a clear picture of all the fees involved.
Ill-fitting structure
Apart from bringing all (or many) debts under one loan for easier management, debt consolidation can be used to pay off debt faster (and potentially reduce the total cost of interest) or reduce repayment amounts to give the budget breathing room. Different borrowers have different needs with debt consolidation so it is really important to be clear with your adviser (chat to the team at netter finance™️) or lender about: (a) what you want to achieve, and (b) the pros and cons of your options. It can be a trade-off, so make sure understand the implications of your choice.
Pros and cons of debt consolidation loans
Pros
- You might be able to access lower interest rates.
- Your debt repayments will be simplified and much easier to manage.
- You might improve your credit score by getting on top of your debt.
- You should feel more in control.
Cons
- There can be fees associated with the process.
- If your new consolidated loan has a longer term than the loans you consolidate, you could end up paying more in interest even if the interest rate is lower.
- You could feel that you’re free to go and take on more debt again. Sometimes a behaviour change needs to happen, too.
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How to apply for a debt consolidation loan in New Zealand
Thinking debt consolidation might be the right option for you?
Here’s what you’ll need to do next.
Assess your debts
What do you owe, to whom, and what are the terms of that lending? Get a clear picture of your current debt situation before you start to consolidate. This will help you come up with a clear plan of action.
Gather your documentation
Get together information that you’ll need for your application. That will include things like proof your income, proof of address, identification and details of the loans you want to consolidate. You may need to provide proof of your New Zealand citizenship or residency. The team at better finance™️ can help you with what information you need.
Submit your application.
Alternatives to debt consolidation loans
You might decide that a debt consolidation loan is not right for you, after all.
If that’s the case, there are other ways you could choose to manage your debt, instead.
Debt management plans
Whether you work with an expert adviser or DIY, you could draw up a plan to manage your debt. That usually involves setting a budget and working out what extra repayments you could make each payday. Often people prioritise paying off their most expensive debt first.
Negotiate with your creditors
If you’re at risk of falling behind on your loans, or you have already missed a payment, get in touch with your creditors as soon as possible. In New Zealand, lenders have an obligation to assess requests for hardship assistance, so this may be an option to explore if times are really tough. Don’t stick your head in the sand – if you’re having trouble with debt, it’s better to act quickly.
Financial counselling
You may be able to access help from a financial mentor, or budget adviser. There is a network of financial mentors in New Zealand, and other organisations that help people with debt issues.
Tips for successful debt consolidation
Don’t take on new debt when you are repaying your debt consolidation loan
It’s really important that you don’t start a new debt problem once you consolidate an existing one. Debt consolidation should be used as a tool to work towards getting out of debt, not freeing you up to spend more.
Create a budget
A solid household budget will help you manage your debt consolidation loan repayments, and hopefully help you keep track of your spending so that you can start to get ahead for your future.
Set goals and review them regularly
Stay on track for your financial future by setting goals for the months and years ahead, and tracking your progress against them. Celebrate even small wins to keep you going.
FAQ
What is a debt consolidation loan?
Debt consolidation loans combine a number of smaller loans into one, with just one repayment.
Are debt consolidation loans a good idea for everyone?
No – as with most financial decisions, it’s important to take time to ensure that any debt consolidation solution you’re considering is an appropriate fit for you. This may depend on the type of loans you have, and the terms of that debt.
What is the difference between a personal loan and a debt consolidation loan?
A debt consolidation loan is specifically designed to help you get debt under control. Personal loans, in contrast, can be used for a wide range of things.
Can I get a debt consolidation loan with bad credit in New Zealand?
You may need to seek professional advice to find out which lender might be a suitable fit for you. In some cases, you may pay a higher interest rate if you have bad credit. But debt consolidation can be a way to start to improve your credit score.
Are there fees or hidden costs associated with consolidating debt?
The fees shouldn’t be hidden, but there can be costs involved. There may be fees associated with paying off the loans you want to consolidate. Your lender may also charge administrative or annual fees for the loans. They should provide clear details of these.
Need some advice on debt consolidation?
Debt consolidation is a tool that many New Zealanders use to regain control of their financial lives. If you think that it could be right for you, seek out a trusted provider to discuss your options. You could soon be on your way to a less-debt future.
Like to find out more? Talk to the team at better finance™️.
Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.