Debt Consolidation Loans and Alternatives

Updated 5 April 2019

Piling up debts cause massive stress for Kiwi households, and sometimes it can feel near-impossible to get on top of. With household borrowing at record levels, making debt affordable and manageable has never been more urgent.

In this guide, we look at debt consolidation - a process of moving multiple debts into one debt, which is repaid with ongoing single payments. Debt consolidation is most likely to be beneficial if you have a manageable level of debt, you don’t plan to take on more debt and already have a reasonable credit score.

In this guide, we outline everything you need to know about debt consolidations, tips to make it cheaper and most importantly get you debt free, faster. Our guide covers:

Know This First: How Debt Consolidation Works

Debt consolidation is a simple process of moving individual high-interest unsecured debts into a single, lower-interest loan. It is designed to help you pay off debts faster with less stress and effort in managing a number of debts separately. You can consolidate your debts with a balance transfer credit card, a personal loan or a home equity loan.

What debts can I "consolidate"?
Generally, it's only unsecured personal debt - store cards, credit cards and personal loans etc. You can't include student debt, mortgages and (in most cases) car loans.

Savings from lower interest
If you pay a range of interest rates, a debt consolidation loan can save thousands of dollars over the life of your loans. For example, if you have a credit card balance of $5,000 at 25% p.a., a personal loan of $7,500 at 18% p.a. and a store card balance of $5,000 at 25% p.a., you can apply for a debt consolidation loan which will come with a single interest rate lower than what you currently pay. This helps you pay the total debt off faster and pay less interest overall.

Changing Spending Habits is Key
Debt consolidation isn’t a magic solution for debt problems. It won’t change your spending behaviour that created debt in the first place. It also won’t help if you’re at a point of a debt crisis and don’t have the money to repay even at a lower level. If this is you, read our Debt Help guide to understand your options.

Top Debt Consolidation Offers

Debt Consolidation Options

There are two popular ways to consolidate debt, and one less popular way which is relatively risky. All three move your debts into a single “easy to manage” monthly bill if organised correctly. The interest rate you pay and how long you repay will depend on the terms you agree with the lender. The options are:

Apply for a Balance Transfer Credit Card: If you qualify for a 0% offer, your debts will become interest-free once you transfer all of your debts. You can then make monthly repayments to clear the balance for the term of the interest-free period. If you find yourself unable to get a 0% offer, there are several low-interest options with interest rates starting at 6.99% p.a.
Apply for a Fixed Rate Personal Loan: The money you are approved for will pay off high-interest debts leaving you with the obligation to make regular payments over a fixed period. Most personal loans give you the option of over-paying without penalty, meaning you can be debt free faster.
If you're a homeowner, there is the option to ask your bank about an equity release or line of credit loan, known as a "Revolving Mortgage". This is a risky solution if you don't repay the debt, as your property is used as security. How it works is quite simple - if you have equity in your property, you can ask the bank to advance a loan on it. You'll pay interest on what you draw down, but the interest rate will be well below a standard credit card and a personal loan. If you have a lot of debts nagging you and own a home, this is one way to clean them up easily and cheaply.

Which options are right for you depends on the amount of debt you have, your current interest rates and your budget to repay it.

Calculating the right amount to borrow

If you’re committed to reducing the amount of money you spend on repaying your debts, it’s essential to spend a moment upfront to make sure you get the best possible deal. Our five steps make it easy:

Calculate how much you need to borrow: Add up all the debts you want to consolidate – this will be the amount you need to borrow.
Decide your payback period: don’t overestimate your ability to repay the loan – if you need $20,000 and it will take you four years to repay it, don’t think you can do it two years. Look at your bank account, how much you earn and how much you spend (excluding all your debt repayments). What’s left is your “free cash flow”. Take your loan total, and divide it by that amount – what you’re left with is how many months it would take to repay the loan.
Allow for unexpected events: With the estimated repayment period you've calculated, multiply by 1.5 to account for the interest costs and also to give you a buffer – you can always overpay spare money after making your loan repayment – most debt consolidation loans don’t charge fees for early or over repayment. Remember, the longer it takes to repay, the more interest you will pay.
Shop around for the lowest interest rate: The interest rate is the major factor in how much your loan costs. You need to see the lowest % - This is the main cost of your loan, so you need to look for the lowest percentage offer.
Apply for a balance transfer credit card if you have good credit: If your total debt is no greater than around $10,000, this is a good option. Talk to the bank before you apply and read our balance transfer credit card guide to get the best deal.

Top Debt Consolidation Offers

Debt Consolidation - 10 Must-Know Facts to do it Right

Polish up your credit history BEFORE applying for debt consolidation

Lenders will request your credit records when you make an application for a loan. If you’ve got a less than perfect credit profile, our credit score and credit report guide has a number of tips on how to boost your attractiveness to lenders.

Is my credit score going to be affected by debt consolidation?
It depends. If you pay off all your existing debts and make regular, on-time repayments on your debt consolidation loan, then your credit profile will not be negatively affected. But if you don’t repay on time, then your credit history will be affected.

What happens if I cannot meet the repayments?
When loan repayments are late and/or defaulted on, fees are charged and your credit report is affected. If you are struggling with debt repayment, see our guide to debt help.

Know Debt Consolidation Limits BEFORE you apply

Lenders available today advertise the possibility of consolidating up to $70,000 using an unsecured personal loan. It’s likely you’ll need a lot less than that to sort your debt out, so shop around to be sure you’ve got the best interest rate and lowest fees. Balance transfer credit cards generally limit transfers to $10,000.

How long can you borrow for?
Most unsecured debt consolidation loans are usually between 1 and 5 years. The larger the
amount you want to borrow, the longer the term usually. Balance transfer credit cards usually offer a 0% interest rate for 6 to 12 months - after that it's normal for a discounted interest rate for the life of the balance owing. This effectively gives no repayment time limit.

If your total personal debt exceeds 50% of your income, debt consolidation probably isn't an option

High debt levels mean a debt consolidation loan is unlikely to be approved for the entire balance. The best thing to do is pick out the highest-interest debt and see if you can put this into a balance transfer credit card or low-interest personal loan. The deal you get will depend on your income and credit history.

If your total debt exceeds 50% of your income and you are not able to get either a loan or a balance transfer credit card, then you can look at making a financial hardship application - see our debt help guide for more details. Such a level of debt is unlikely to be repaid within five years and debt relief is a sensible option. You can contact the Citizens Advice Bureau who has experience in negotiating with your lenders.

The best thing to do is prepare a budget and ask for the debt(s) to be restructured in a way that brings your debt down, either on your own or with the help of an expert. Many New Zealanders with high debt levels accept that they are struggling to keep afloat and continue to make repayments, unaware that the debt will stay around for years. You don't have to face this stress and financial hardship - help is available.

Only consolidate debts that have a HIGHER interest rate than your consolidation loan

You decide what debts to include (i.e. consolidate) and which ones to leave as they are. For example, if you have a debt that has a lower interest rate than the current debt consolidation loan rates, it will be smart to keep it as it is. Your debt consolidation lender will make sure that you can afford to repay any existing loan alongside your new loan, so you won't find yourself stretched.

Consolidating credit cards with a loan is a bad idea unless you don't qualify for a balance transfer credit card

Expensive credit card debt is best suited to balance transfer credit cards rather than a debt consolidation loan. If you are approved for a balance transfer credit card, you can pay as little as 0% interest for up to 12 months. Most deals allow you to consolidate the balances of as many cards as you have up to the approved limit of your new card.

Once approved, you’ll pay 0% interest on the total balance transferred. As an example, if your balance transfer totals $10,000 you could save up to $2,000 per year if the alternative were a debt consolidation personal loan with a 20% p.a. interest rate.

As with any balance transfer, it’s essential not to run up new balances on the existing cards – cancelling them once the transfer is done is the best idea.

You must repay existing debts with a debt consolidation loan

If your debt consolidation loan application is approved, you will receive the money in your bank account. You then need to make manual payments to pay off the existing debts. We recommend settling debts as soon as you have your loan money sitting in your bank account – this will further reduce interest costs and lower the cost of your borrowing overall.

If you apply for a balance transfer credit card, then the card issuer will repay the existing debts you've transferred directly so you won't be involved.

You need a plan to stop running up more debt

This is essential to stop the cycle of high-interest personal debt repeating itself. To give yourself the best chance, the following steps can get you on the right track:

Cancel ALL credit and store cards you've transferred debt from. This is essential.
Do a personal budget.
Set yourself a weekly discretionary spend limit for entertainment, and stick to it.
Learn to say "no" instead of saying "yes" on non-essential items you know you can't pay for right now.
Look to shop more with cash and not card (even EFTPOS). It's much easier to see where the money goes with cash; plastic purchases are harder to keep track of.

Don't consolidate debts if you're close to paying them off

If you have a manageable amount of debt that you're on track to repay in 3 to 12 months, save yourself the hassle and stick with it. Further loan applications will affect your credit history. If you can overpay debt every month, your balance and interest costs will fall away.

Consider visiting a budget advisor

Budget advisory services exist all over New Zealand, providing free-of-charge assistance to anyone needing help keeping their finances in order. Their services include helping you prepare a weekly budget, isolating spending habits you can eliminate all while providing a level of moral support. An appointment takes less than an hour and many have vast expertise in personal debt issues.

Stay strong and have will power as you make repayments

Facebook groups for debt support provider moral support during the repayment process. Servicing debt is never fun, but being open about it with your family will lower the risk of adding new debt. Keeping track of how much you have to repay is a good way to stay motivated.

Debt Consolidation Frequently Asked Questions

How do I get the lowest interest rate on a personal loan?

Our best buy personal loans list options from 6.99% - the better the applicant's credit history and ability to repay, the lower the interest rate. We frequently hear of readers who have applied for a low interest rate debt consolidation loan and been offered something above even their most expensive debts. Cleaning up your credit history (see below) and following a strict budget gives you the best chance of getting a lower interest rate.

Do debt consolidation loans hurt your credit score?

It depends. If you make timely repayments, there will be no effect on your credit score. If you are late with repayments, it is likely the lender will enter this on your records. Every situation is different - the general rule is that repaying on time (or early) is positive, and vice versa.

Is it a good idea to consolidate your debt?

It depends. If you can get a loan or balance transfer with a lower interest rate than you are currently paying, and the fees are low, debt consolidation is a good idea. If you are very close to repaying all of your debts, it may be an idea to continue to do so to avoid more credit applications and associated fees.

How much does it cost to consolidate your debt?

Fees range, but usually it will be a one-off loan application fee ($100 to $250 is the standard range), or up to $50 for the joining fee of a balance transfer credit card. There is also the cost of the interest, and any late payments incurred.

Can you get a debt consolidation loan with bad credit?

It depends. If your credit is particularly bad and you face being refused, our debt help guide lists community-based lenders that can assist with low interest loans for specific purposes. Generally, the more troubled your credit history, the higher the interest you pay.

What is the best debt consolidation loan?

We have listed the top picks for loans and balance transfer credit cards below.

What happens if I can't pay back my debt consolidation loan?

If you are struggling to make repayments, you are best to talk to your lender. Our debt help guide outlines the process of making a hardship application, whereby the lender looks at your finances and can freeze your repayments until you are financially stable.

What is the purpose of consolidating debts?

Debt consolidation is popular for reducing debt expenses by paying lower interest rates, and making debt management easier - you make one regular repayment instead of one for each debt you have.

Top Debt Consolidation Loan and Credit Card Offers

We outline the best current offers available. A popular tip is to check your credit score and credit history to make sure there are no errors that could hurt your application. Read our guide to credit scores to know more.

1. Top Low-Interest Personal Loans - From 6.99% p.a for 1-5 years

Loan Size	Cheapest Personal Loans Lender and representative interest rates for borrowing over 1-5 years unless stated
$3,000 to $9,999	*Secured Loans* NZCU Baywide 9.90% p.a. with a one-off $200 fee The Co-operative Bank (from) 6.99% p.a. with a one-off $200 fee TSB Bank 14.95% p.a. with a one-off $250 fee Unsecured Loans Harmoney from 6.99% p.a with a one-off $200-$450 fee^ Squirrel Money from 8.95% p.a with a one-off $250 fee* NZCU Baywide 11.90% p.a. with a one-off $200 fee
$10,000 to $50,000	Secured Loans NZCU Baywide 9.90% p.a. with a one-off $200 fee The Co-operative Bank (from) 6.99% p.a. with a one-off $200 fee TSB Bank 14.95% p.a. with a one-off $250 fee Unsecured Loans Harmoney from 6.99% p.a with a one-off $200-$450 fee^ Squirrel Money, from 8.95% p.a with a one-off $250 fee* NZCU Baywide 11.90% p.a. with a one-off $200 fee

^Harmoney and *Squirrel Money are peer to peer lending platforms - please read our dedicated Harmoney review and Squirrel Money guides for information about borrowing.

2. Top Balance Transfer Credit Cards - 0% p.a for 6 to 12 months

Our guide to balance transfer credit cards covers the best options offered by a number of banks, including BNZ and ASB.
Our pick of the bunch is the BNZ MasterCard which offers 0% for 12 months, followed by the ASB Visa Light.

BNZ Low Rate Mastercard, 0% for 12 months, 13.45% interest on any remaining transferred debt until it’s paid off

bnz low rate mastercard debt consolidation

The BNZ has the best 0% offer with 12 months interest-free and a low-ish annual fee.

The deal:

Interest rate: 0% for 12 months, then 13.45% on the remaining balance and new purchases
Annual fee: $35 (reduced from 1 April 2018) and currently waived in the first six months
Balance transfer fee: none
Monthly payments: Must be above the monthly minimum (either 2% or $5 of the balance owing - whichever is greater)

What you need to know:

You need to transfer a balance in the first 30 days to get the 0% interest period.
You can't transfer a balance from another BNZ card.
After the 0% ends, it's 13.45% interest on any remaining transferred debt until it’s paid off.
Don't spend/withdraw cash on this card, the interest rate for new purchases is 13.45%
For more details or to apply, click here

ASB Visa Light - 0% for 6 months, 13.50% interest on any remaining transferred debt until it’s paid off

The ASB offers an attractive balance transfer for short term debt with no fee

The deal:

Interest rate: 0% for 6 months, then 13.50% afterwards
Annual fee: $0
Balance transfer fee: none
Monthly payments: Must be above the monthly minimum (either 2% or $5 of the balance owing - whichever is greater)

What you need to know:

You need to transfer a balance in the first 30 days to get the 0% interest period.
You can't transfer a balance from another ASB card.
After the 0% ends, it's 13.50% interest on any remaining transferred debt until it’s paid off.
Don't spend/withdraw cash on this card, the interest rate for new purchases is 13.50%
For more details or to apply, click here.

Debt Consolidation - Final Thoughts

Debt consolidation is not something you want to do regularly. It should be a one-off task that solves an immediate debt issue, and repayments need to be a top priority to avoid running into trouble.
Balance transfer credit cards are an excellent idea to move card debt - if you can bag a 0% interest rate deal, you're going to save hundreds or even thousands.
Working with a budget advisor might seem like a foreign concept, but they are there to help and give you moral support you may not find elsewhere. There are professionals all over New Zealand who offer a free service.
Avoiding new debt while servicing a debt consolidation loan or credit card is key to staying in control.