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The Dangers of Debt Consolidation - The Definitive New Zealand Guide

Understand the costs and dangers of debt consolidation. Our guide explains common pitfalls, financial risks, and effective alternatives to manage debts and minimise interest costs.
Updated 28 July 2025

​Summary
  • Debt consolidation can seem like an attractive solution for managing multiple debts. The appeal of rolling several loans into one payment is undeniable, especially if you're struggling to balance several payments each month.
  • However, this convenience often comes with significant drawbacks and serious consequences for those trying to escape debt. While it might simplify your monthly payments, it can lead to being front-loaded with interest repayments and other hidden costs that can make your financial situation worse in the long run.
  • When done right, debt consolidation is cost-effective, but many New Zealanders rush in and do it wrong. To help you make an informed decision, our guide explores the dangers of debt consolidation, the common pitfalls to avoid, trusted lenders who offer debt consolidation, and proven potential benefits when done right.

Our guide covers:
Suggested watch: In the video below, MoneyHub Founder Christopher Walsh gives an overview of this guide to help you make an informed decision about debt consolidation options:

What is Debt Consolidation?

Debt consolidation involves taking out a new loan to pay off multiple smaller debts. This can be done through various methods such as personal loans, balance transfer credit cards, or putting the debts onto the mortgage (known as borrowing against your home). The primary goal is to simplify your finances by consolidating multiple payments into one using one of many methods available:


Personal Loans
  • In most cases, you apply for an unsecured personal loan from an online lender, bank or credit union. Once approved, you use the loan funds to pay off your debts. The idea is that the interest rate for a personal loan is lower than the interest rates on your existing debts.
  • Approval process: Lenders assess your credit history, affordability, and debt-to-income ratio to determine eligibility and loan terms.
  • Costs: Interest rates vary based on affordability and credit history, and fees are usually charged when the borrower accepts the loan.

Balance Transfer Credit Cards
  • You transfer the balances of your high-interest credit cards to a new credit card with a lower (or 0% introductory) interest rate - our guide to balance transfer credit cards explains the current offers.
  • Approval process: Issuers evaluate your credit score and financial history. Balance transfer limits depend on your credit limit.
  • Costs: The only upfront cost is the credit card annual fee, alongside the interest rate you agree to. A balance transfer card usually charges between 0% and 6% p.a. for a specific period (e.g., six months) or for the life of the balance.

Home Equity Loans
  • Many New Zealanders consider paying off personal debts by borrowing against their house. This was common during the pandemic when mortgage rates could be found for around 2.50% p.a. and personal loans and car loans had interest rates of around 10% p.a. This loan is secured by your property, meaning your home is collateral. You repay it for years to come, as it's now part of your mortgage.
  • Approval process: Banks may require a home valuation, but they'll likely look for affordability, a credit check, and proof of income. The equity in the home must be sufficient to cover the loan.
  • Costs: Mortgage interest rates are almost always lower than unsecured loans because the loan is secured. Your bank may charge other fees.

The Potential Traps and Problems with Debt Consolidation (And How to Avoid Being Caught Out)

Interest Costs Restart All Over Again (and Add Up)

Unknown to most New Zealanders (considering debt consolidation) is the significant drawback of the interest clock being restarted on your debt. We explain how this works and what it means:
  • Extended loan term: When you consolidate your debt, you will likely extend the repayment period of your existing loans. For instance, if you originally had two years left to pay off your loans and you consolidate into a new five-year loan, you now have five years of interest payments ahead. This extended term will, for most people, lead to higher overall interest costs, even if your monthly payment is lower.
  • Front-loaded interest payments: Many loans, especially mortgages and personal loans, are amortised, meaning the initial payments go primarily toward interest rather than the principal. When you consolidate your debts, you reset this process, which means a significant portion of your payments at the beginning of the loan term will go toward interest rather than reducing your principal balance. You effectively end up paying more interest and delaying the overall repayment.

Suggested watch: In the video below, MoneyHub Founder Christopher Walsh explains how debt consolidation can cost much more by working through a simple example.

Less Loans to Manage Can Create a False Sense of Security

We believe that the convenience of simplified payments can, more often, mask real debt and create a false sense of financial security. It might feel like you have less debt because you're only making one payment, but this is not the case. You still owe the same amount and potentially a lot more in the future due to extended terms and interest.

​We see debt consolidation as a convenience trap unless you find the right deal and aggressively repay your balance well ahead of the repayment schedule. ​

Paying More Fees (and Additional Interest Costs on Those Fees)

Many consolidation loans come with fees that are standard with any personal lending. These fees are almost always added to your loan, and it means you'll be paying interest on the fees until your loan is fully repaid.

For example, a $350 loan fee on a 5-year, 15% p.a. personal loan costs around $500 to repay. This is just one contributor, along with a longer repayment period, that can make debt consolidation much more expensive than simply repaying the most expensive (e.g. highest interest rate) debts first.

Balance Transfer Credit Cards Sting Those Who Make New Purchases (and Make Debt Even Harder to Clear)

While balance transfer credit cards don't usually have high card fees, any new purchases you make on the card will be charged standard interest rates. For example, if you transfer $5,000 to a balance transfer card with a 0% p.a. rate but then make new purchases totalling $3,000 with an interest rate of 23.99% p.a., there's a lot of interest to pay. Over three years, assuming you just make minimal repayments, you could end up paying around $1,250 in interest on the $3,000. You still have to repay the balance and transfer the original balance.

Our view is simple: Balance transfer credit cards are a debt trap unless you eliminate the risk of making new purchases from day one. Our Credit Card Debt Amortisation Calculator demonstrates how expensive credit card debt can be based on the longer it stays around.

Video guidance: MoneyHub Founder Christopher Walsh explains how our Credit Card Debt Amortisation Calculator shows the true cost of credit card debt, and why large balances cost big money. 

Putting Personal Debt on a Mortgage has Significant Long-Term Costs

If you borrow $20,000 against your home at an interest rate of 7.50% p.a., and your mortgage term is 20 years, the total repayment amount over the life of the loan would be approximately $38,800. This includes substantial interest payments due (around $18,880) to the long repayment period. Any fees you incur to get this loan will be added, which is why 'putting personal debt onto the house' is an expensive long-term cash burner.

Important: Before signing any loan agreement, review the terms and conditions and make sure you understand and appreciate the total cost of the loan, including fees and interest, before deciding to consolidate your debts.

Instant Risk to Your Assets

If you consolidate your debt by putting it on your mortgage, your home becomes the collateral. This means your home can be sold if you fail to make payments later due to financial hardship. Loading a mortgage up with debt adds more repayment stress, which continues to worry many New Zealanders given the amount of homeowners behind on their mortgage per this May 2023 RNZ article.

For example, you could lose your home if you borrow $50,000 against your home to pay down car debts, personal loans, credit card balances and later default. This is a significant risk compared to unsecured debt, where the consequence is limited to damage to your credit score and financial history.

Spending Habits Don't Change, and Debt Will Continue to Grow

You may find yourself in debt again without addressing the underlying issues that led to the debt, such as overspending or the lack of an emergency fund for inadequate budgeting. Developing better financial habits, like creating a budget, tracking expenses with an app, and prioritising savings is crucial.

Too many New Zealanders have so little money - consolidating your debt won't help you get ahead if you have the same habits. We suggest getting a budget app to help you avoid this trap.

Developing good financial habits, such as creating and sticking to a budget, is essential for long-term financial health. For example, if you consolidate your debt but continue to overspend, you'll likely be back in debt quickly.

It's Often Cheaper Just to Pay Off Your Existing Debts by Order of Most Expensive Interest

Instead of consolidating, you might find paying off your existing debts cheaper and more effective using methods like the debt avalanche.

This approach involves paying off debts with the highest interest rates first while making minimum payments on others. By tackling high-interest debts first, you reduce the total interest paid over time and accelerate your path to becoming debt-free.

Example: If you have multiple debts, such as a credit card with a 23.99% interest rate, a personal loan with a 12.99% interest rate, and a car loan with a 9.99% interest rate, focusing on the credit card debt first will save you the most money in interest payments. Once the credit card is paid off, you can then focus on the next highest interest-rate debt, and so on.

Suggested approach: Make a list of all your debts, including their interest rates and balances, and prioritise paying off the highest-interest debt first. Use all spare money you have to make additional payments on the highest-interest debt. This approach saves money and provides a clear, structured path to becoming debt-free.

When to Consider Debt Consolidation (and How To Determine When to Avoid It)

​Debt consolidation can be beneficial in certain situations, such as when you have a stable income, strong affordability, a plan to repay early and a commitment to avoid accumulating new debt. It is also useful if the new loan has a significantly lower interest rate than your current debts. However, if the true test is the total cost of the debt consolidation loan vs your existing debts.

Suggested watch: The best way to determine this is to use an app like ChatGPT with a proven script and accurate data. MoneyHub Founder Christopher Walsh explains this in the video below (with a script in the video's description):
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