Can consolidation loans help people to become debt-free?

Over time, it’s common for people to accumulate a few different debts. Maybe you have a few credit cards; maybe you financed your car – maybe you have a penchant for buy-now-pay-later wardrobe purchases. Whatever debts you have, you can choose to make separate repayments for each, or you can consolidate your debts, rolling them all into one simplified loan. We’ll take you through what debt consolidation entails in NZ, what the benefits are, and we’ll give you a heads up about some common traps people fall into.

So, what is debt consolidation?

In a nutshell, debt consolidation is the process of taking all of your different debts and packaging them together into one. The aim of the game is to simplify your finances and get you debt-free faster. Instead of making regular repayments for multiple loans to multiple lenders, you’re left with a single weekly or monthly repayment, which you pay to just one provider. Pretty efficient, huh?

How do debt consolidation loans work?

To combine your debts, you need a debt consolidation loan. Your loan provider will give you enough money to clear all of your outstanding debts, plus a little extra. The “extra” is a bit of additional padding to fall back on if an unexpected cost pops up; that way, you won’t have to take on any more loans. You’ll make regular repayments to the loan provider until you’ve paid back everything with interest.

There are loads of different types of debt that you can consolidate. For example, you can combine credit cards, personal loans, car loans, hire purchases, buy-now-pay-later balances – the list goes on. When you apply for a debt consolidation loan, you have to list all of your different debts, and then you can choose which ones you want to combine.

Why opt for a debt consolidation loan?

A consolidation loan is more than just a way to combine debt; often, you can get better terms than what you have in your existing loans. If you’re consolidating multiple high-cost debts, it’s likely that you’ll get a lower interest rate, meaning you could end up with lower repayments and pay less overall. You might also get a loan term that’s better for you, whether that means a shorter one so you can pay off your debt faster or a longer one to give you more time and lower your repayments. To get a better idea of the terms, you could be looking at, give our debt consolidation loan calculator a whirl.

Having one manageable weekly or monthly repayment is also a huge advantage. It’s easy to lose track when you have multiple repayments to make. They’re often scattered and aren’t necessarily timed well – you know what it’s like when a repayment is due right before payday. Defaulting or missing repayments is dangerous because it can potentially damage your credit score, so when there’s only one to manage, the risk of making mistakes significantly decreases.

There are some really quick and easy debt consolidation loans available, which makes it an appealing option. We offer loans of up to $150,000, and our process is entirely online. That said, we have some brilliant advisers (real people, not bots) on hand if you need assistance. Through our platform, we can match you with the best possible terms and interest rates across a range of trusted lenders throughout NZ. Applications won’t impact your credit score. And if patience isn’t a virtue that you possess, that’s not a problem because we’ll give you a decision within 60 seconds. Interested? Apply here and see what sort of terms we can offer you.

Let’s do a quick recap on the benefits of a debt consolidation loan…

• Easier to manage: It can be difficult to keep up with several debts, particularly high-interest loans, so rolling them into one repayment can be easier to stay on top of.
  
• Lower interest rates: Often, you will pay a lower interest rate for a debt consolidation loan than you would with hire purchases or credit cards.
  
• Smaller repayments: Debt consolidation loans usually have lower interest rates that are spread over a longer period, making the monthly or weekly payments smaller.
  
• Easier to budget: With only one repayment to make, it’s usually easier to manage your finances and keep track of what you’re spending.

Common traps to look out for when managing loans.

Consolidating or refinancing your debts can be an excellent option when it simplifies your financial commitments and results in paying less fees and interest, but it’s not without its risks. Here are a few things to be wary of:

• New debt: Debt consolidation loans are designed to simplify your finances and help you pay off your loans in a more manageable way. However, if you keep taking on new debt, it defeats the purpose because once again, you’ll have multiple loans to juggle.
  
• Repayment costs: Just like any other loan, missing repayments can result in a bad credit rating. So it’s crucial that you understand what your new repayments will be and that you’re sure you can meet them before agreeing to anything.
  
• Interest incurred: It pays to do the maths. While lower repayments over a longer-term might look appealing at first glance, you may end up paying more interest in the long run. Our debt consolidation personal loan calculator is a handy tool if you need some help working it all out.
  
• Additional fees: Beware of hidden fees and charges. Alterations, late payments and payment defaults can all incur extra costs. Some lenders may even sting you for paying off existing loans early, so be sure to check the terms and conditions of both your existing loans and your potential debt consolidation loan.

If it seems like you’re getting the cheapest debt consolidation loan, always make sure you read the small print… even if you have to get your glasses out to do it.

This blog is provided for general information purposes and is not a recommendation you enter into or exit any particular loans or insurance policies. Information on the blog does not take into account your particular circumstances, including your objectives, financial situation or needs. We recommend you seek advice from a financial adviser before taking any action as appropriate. The Lending People Limited (FSP240365) is a licensed financial advice provider and can provide advice on some types of personal loans, insurance. Find out more about The Lending People and how we may be able to help you.