Debt Consolidation

Updated March 2018
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Debts piling up is a massive stress for Kiwi households. With household borrowing at record levels, making debt affordable 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.

Debt Consolidation - 15 "Must Knows" To Do It Right

First, an explanation on 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 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.

Debt Consolidation can be done in THREE ways

There are two popular ways to consolidate debt, and one less popular and relatively risky. All three move your debts into a single “easy to manage” monthly bill if organised correctly.
  1. 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.
  2. 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 of time.
  3. If you're a home owner, talk to your bank about an equity release or line of credit loan, known as a "Revolving Mortgage": This is 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. 
 

Calculating the right number for dent consolidation

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:
  1. 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.
  2. 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.
  3. 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.
  4. 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. 
  5. 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. 
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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 you 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. 
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It is YOUR obligation to 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. 
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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. 

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 total $10,000 you could save up to $2,000 per year if the alternative was a debt consolidation personal loan with a 20% p.a. interest rate.

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

Know Debt Consolidation Limits BEFORE you apply

Lenders available today advertise the possibility to consolidate 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.
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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 have the best chance, the following steps can get you on the right track:
  1. Cancel ALL credit and store cards you've transferred debt from. This is essential.
  2. Do a personal budget. You can download our easy-to-use budget template here. (LINK)
  3. Set yourself a weekly discretionary spend limit for entertainment, and stick to it.
  4. Learn to say "no" instead of saying "yes" on non-essential items you know you can't pay for right now. 
  5. 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.

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

This sounds obvious but it's worth noting. 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. 
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Top 5 Debt Consolidation Loans and Credit Card Offers

Low Interest Personal Loans - From 6.99% for 3-5 years

Balance Transfer Credit Cards - 0% interest for 12 months

Our guide to balance transfer credit cards covers the best options offered by a number of banks, including Westpac, BNZ and ASB. Our pick of the bunch is the Westpac Hotpoints MasterCard which offers 0% for 12 months.
​The deal:
  • Interest rate: 0% for 12 months, then 5.95% for the life of the balance
  • Annual fee: $44 (waived for the first year)
  • 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:
  1. You need to transfer a balance in the first 30 days to get the 0% interest period.
  2. You can't transfer a balance from another Westpac card.
  3. After the 0% ends, the interest increases to 5.95% on any remaining transferred debt until it’s paid off.
  4. Don't spend/withdraw cash on this card, the interest rate for new purchases is 13.45%​
  5. 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,