How Does Debt Consolidation Loan Work, And Is It The Right Choice For You?

Date Mar 5, 2021
Blog category Debt Consolidation Loan
By Sieg C
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Debt consolidation loan can get you out of your financial slump. Raise your credit score and get out of debt faster. Read on to learn more.

A debt consolidation loan lets you combine all your high-interest debt such as outstanding credit card and other overdue payments into a single loan. This loan offers a lower interest rate, which also provides more lenient payment terms.

This is designed to help Kiwis pay off their debt faster, so they can easily move on with their lives. But how does this work? Learn the types of debt can you consolidate and how to apply. See if this works best for your financial situation, or if you're better off with other repayment options.

How can debt consolidation help you?

Managing all your different debts can be too much to handle. It can be very stressful and financially draining to take care of them all at once. It can negatively affect your credit score and delay your plans for the future.

This way, you won’t have to get swarmed with all the due dates and penalties as you only have one loan to take care of. Even if it looks like a lot right now, it will surely be more manageable as you only have one thing to sort out and focus on. Of course, you still have to be a responsible borrower and pay your dues on time.

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What type of debt can I consolidate?

The inclusions of what you can consolidate varies per provider. It’s recommended to always ask your bank before applying for a debt consolidation loan. For most lenders, they only allow the following:

  • Credit card debt
  • Medical and hospital bills
  • Overdue utility payments
  • Mobile phone bills
  • Overdue rent
  • Personal loans
  • Company loans
  • Other debts without collateral

On the other hand, here’s a list of the types of debt you can’t consolidate:

  • Mortgage and home loans
  • Car and auto loans
  • Government loans
  • Lawsuit expenses
  • Unpaid tax debts

Why can’t you consolidate all your debt?

As much as a debt consolidation loan is great, you can't consolidate everything. While all debts are of the same footing to individuals, it’s not the case for financial institutions. Your debts are usually categorised into secured and unsecured.

Secured debts are something that you’ve taken out because you’re purchasing an item for collateral. For example, a home loan you’ve taken out to purchase your house. Most of these debts can’t be consolidated, but some providers may make exceptions depending on your case.

Unsecured debts can be consolidated because there’s no collateral related to them. There’s no property or item that your bank or lender can take out when you miss out on your payments. With this nature of unsecured loans, this makes debt consolidation more applicable.

Read: Balance Transfer Credit Card vs Personal Loan: Which One Works Best For Debt Consolidation?

What are the advantages of debt consolidation loan?

A debt consolidation loan has a lot of advantages in paying off your debts. If you’re thinking twice about debt consolidation, take a look at some of its best features and advantages over paying all your debt and interest fees separately.

Improve your credit score

Consolidating your debts into a single loan can improve your credit score. Having too many outstanding debt can hurt your credit score, and may limit your credit spending ability. As long as you're consistent in paying your consolidated loan, you may be able to positively change your credit score.

Lower interest rates and longer repayment terms

A debt consolidation loan doesn’t only offer lower interest rates, but also longer repayment terms. Although it varies per lender, most banks offer a longer repayment period to help you get out of debt in the long run.

Overpayments are allowed

If you have spare money, you can spend it to overpay your loan. While most providers allow overpayments, it’s still best to consult your lender about your best repayment options.

What are the disadvantages of a debt consolidation loan?

This can help you get back on track financially, but it may also put you into more debt if you don’t know the fees, credit, interest, and other costs associated with your loan. Here are some of the drawbacks that you need to know.

Lower interest rates can add up over time

Yes, you pay lower interest rates upfront. However, it can also add up over time. You may want to calculate how much the low-interest rate can add up over your repayment period. There may also be some charges you need to pay in the long run.

It may not offer a long term fix

Of course, no one wants to spend all their lives paying everything they owe. However, it may be exactly what you end up doing. As it has long-term repayment terms, you may delay your repayments even if you already have the money to pay off your amount due.

Read: Get Out Of Debt Fast: How Credit Card Balance Transfer Works

There may be other better options

Of course, you can look at other options such as balance transfer credit cards and personal loans  and see if they work better for you.

What are the best debt consolidation loans in New Zealand?

Ultimately, it always depends on your needs and financial situation. Generally, here are some debt consolidation loans that tick all the right boxes. Check out the interest rates, fees, terms, and loan types you can apply for.

Loan type Interest rates Loan fees Payment terms
ANZ Secured and unsecured From 13.9% p.a. N/A 6 months to 7 years
ASB Secured and unsecured From 12.95% p.a. Loan processing fee of $99 1-5 years
BNZ Secured and unsecured From 17.85% p.a. Loan facility fee of $50 1-5 years
First Credit Union Secured and unsecured From 9.95% p.a. N/A 1-5 years
Harmoney Unsecured From 6.99% p.a Loan application fee 1-5 years
Kiwibank Secured and unsecured From 13.95% p.a. N/A 6 months to 7 years
Lending Crowd Secured and unsecured From 5.03% p.a. Loan application fee 1-5 years
NZCU Baywide Secured and unsecured From 8.9% p.a. to 10.9% p.a. Loan application fee of $250 6 months to 10 years
Squirrel Secured From 8.95% p.a. Loan application fee of $500 1-5 years
Westpac Secured and unsecured From 13.9% p.a. Loan application fee of $100 1-5 years

Talk to your bank or a financial advisor to better understand your options. You can also consult with your lender to know the comprehensive list of fees associated with your loan. Get a quote before finalising your loan application.

You can start by comparing different lenders and their fees, so you don’t have to go through the hassle of visiting different websites to get a quote. Find the best debt consolidation loan, right here at glimp.

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