Debt consolidation is quite simple to explain, it's merely the combination of multiple debts into one bigger personal loan.
The aim of debt consolidation is primarily to save on interest overall but, there are many secondary aims, which include the ability to better manage multiple debts and to lower the total amount of money you pay towards debt every month to make it more affordable and to free up money. Debt consolidation is ideal for a variety of different debt situations but, not all.
Most Kiwis would have heard about debt consolidation and although it's usually advertised and sold as a solution to over indebtedness many people have successfully used it to help them lower their monthly debt payments even if they were still able to manage their debts efficiently.
This means that a person with multiple high interest debts that is still able to keep track of them and manage the monthly, weekly or fortnightly repayments can combine all their debts and pay a single installment per selected period with a lower overall interest.
Why Consolidate your Debt
Consolidation will allow you to combine multiple debts that are becoming difficult to manage into one single loan. This makes it easier to manage your debt because you only have one single payment to make per payment period.
Additionally, you can choose to take a longer loan term and therefore, benefit from lower payments. Consolidating debt, on the other hand can also save you money if your smaller debts carry high interest. If you consolidate debts that are not high interest you may actually end up paying significantly more for your loan.
Debt Consolidation Service Providers
There are multiple financial service providers that provide debt consolidation loans. This ranges from large banks like ANZ, Kiwi Bank, ASB and BNZ to alternative credit providers and online lenders. Most debt consolidation loans are designed to offer a low interest rate and offer longer loan terms to ensure that the customers monthly payments are reduced if necessary.
Typically Kiwis prefer to approach their banking company to consolidate their debt since they’ve already developed a relationship and have a history with the service provider. That being said there are many free advisory service which will be able to access your financial position and help you determine if consolidation will benefit you.
Although there are countless providers of debt consolidation loans in New Zealand and the loan interest rates, terms and conditions are highly flexible it's important that you choose to work with a reputable lender that understands debt consolidation and can conduct a professional analysis of your finances to determine if it is right for you.
This is because so many lenders who are unqualified and unable to access people's financial circumstances will gladly offer you a fast loan and, could cause more harm than good in the long run. When in doubt always go for a second opinion and preferable make use of the many free debt consultancies and advisors who are willing and able to help you.
Primary Benefits of a Debt Consolidation Loan
- Lower your monthly payments by selecting a longer loan term
- Save money by securing a lower overall interest
- Better manage your debts with one payment
- Avoid defaulting on loan repayments
Although a debt consolidation loan should be able to offer all of the above benefits it's not always the case, particularly for people who are consolidating debt primarily to free up cash and secure lower monthly payments.
This is because even though the combined interest will be lower, a longer loan term means you will be paying that interest for a longer period of time. As mentioned, consulting with a free advisory service that specializes in debt consolidation is a good first step and will allow you to make the best possible decision.
Qualifying for a Debt Consolidation Loan
Most debt consolidation service providers will have their own set of unique eligibility requirements and will access you financial situation and needs in their own way to determine if they are willing to consolidate you debts. These are the general requirements for all lenders:
- You must be aged over 18
- You must be a NZ citizen or have permanent residence
- You must have a stable address history
- You must be employed or self employed
- You must be able to demonstrate your ability to repay the loan
- In most circumstances you will have to provide security for the loan
Additionally a lender will look at things like assets, income and expenses as well as combine all of your existing debts and consider the interest being charged on them before making a decision as to whether consolidation is right for you.
Typically it is unsecured debts that bare high interest that can be consolidated and this include credit cards, store cards and unsecured personal loan. Home and vehicle loans are rarely worth consolidating given their low interest rates and long loan terms. If you think your home loan or car loan are costing you too much than you should consider refinancing but, that is a whole other ball game.
How to Compare Debt Consolidation Loans
You can easily compare debt consolidation loans by considering the APR (Annual Percentage Rate) offered by the various lenders, however, although this may be a good starting point it will not always give you an indication as to which loan and lender will offer you the best rate. This is because the majority of lenders will customize the interest on your loan based on your credit score, loan amount and individual circumstances.
In most instances looking for lenders that offer pre-approval or have a debt consolidation calculator available on their website will allow you to gain a clear picture of what it's going to cost and how much you will be able to save before you fill in any forms or make a formal online loan application.
Remember making an application to consolidate your debt will prompt the lender to run a credit check on you which will appear on your credit file. Too many searches on your credit file could significantly affect your ability to actually secure a loan.