Getting into Debt to Meet Short Term Living Costs - The Definitive New Zealand Guide

Living costs are high, but should you borrow to keep up with household bills and mortgage payments? Our guide explains the costs, pros and cons, alternatives and must-know facts to help you make an informed decision.

Updated 14 October 2024

Summary:

Despite recent drops, the Official Cash Rate (OCR) is causing significant stress for Kiwi household finances, and many will be considering their options to try and make ends meet.
One of these potential pathways is getting into debt, which can be a slippery slope for many. However, with short-term pressure on households, there may be few alternatives given the stark rise in mortgage rates from the lows of 2% p.a. to 5.50%+ p.a.. Many kiwis will be anxious about whether their current financial position is strong enough to keep up with increased mortgage repayments
Wages haven't increased at the same rate as these increases in mortgage rate or general cost inflation, meaning Kiwis will need to fully analyse their financial situations to ensure they can continue to stay financially strong.
Getting into debt can seem attractive when you're facing short-term living expenses and don't have the funds to pay for them upfront. However, it's important to consider the potential risks and consequences before taking on debt.
Debt is expensive - if you borrow $5,000 for two years at 15% p.a., our personal loan calculator estimates you'll repay $242 per month - this is not cheap and needs to be carefully budgeted for.

To help you decide if taking on personal debt is right for you, our guides covers:

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MoneyHub Founder Christopher Walsh shares his views on getting into debt to meet living costs:

"Deciding whether to get into debt to meet short-term costs of living expenses is a complex decision that requires careful consideration. Understanding the potential risks and benefits of borrowing is important, as exploring all possible alternatives before deciding to take on debt. If you decide to get into debt, it's important to make sure that you can afford the loan payments and that you plan to pay off the debt as quickly as possible".

"Getting into debt to meet the short-term cost of living expenses can be risky. If you decide to proceed, it's important to make sure that you can afford the loan payments and that you plan to pay off the debt as quickly as possible. Too often, I've seen where things go off the rails and new debt taking out takes much longer to pay off, hurting everyday finances".

"The next few years will likely be a struggle for many Kiwis. Still, if you can be mindful of your debt levels and strive to maintain a healthy balance between your debts and your income, you'll be able to come out of this period in a better financial position than when you went in. Before you consider debt, I'd strong suggest looking at cutting back on every day costs - while it can be easier said than done, our list of 20+ ways to save on household bills is a good starting point".

Christopher Walsh
MoneyHub Founder

Getting into Debt to Meet Short Term Living Costs - Reasons Why

Why Would You Go Into Debt to Meet Short-Term Living Costs?

Most people understand that high debt levels aren't great in the long term. However, to meet urgent costs, the short term takes priority over the long term. In light of this, there are multiple reasons why someone might consider going into debt to meet short-term costs of living expenses. Some of the most popular reasons include the following:

1. Unexpected expenses.

An unexpected bill or expense (such as a car breaking down, a medical emergency or unexpected costs for children) can arise at any time, and if you don't have the funds available to cover it, you may need to borrow money to pay for it. Often, these costs cannot be pushed back and must be dealt with urgently to avoid severe consequences.

2. Insufficient income.

If your income is insufficient to cover your basic living expenses, you may need to borrow money to make ends meet. This scenario is a particular risk for many Kiwis given the stark increase in inflation (making the trip to the supermarket more expensive) and mortgage rates (given that most of the New Zealand mortgage market is on either a one-year or two-year fixed rate mortgage). As a result, many Kiwi households will experience drastically higher cost increases (through rising food and gas prices) and higher mortgage interest payments without a corresponding rise in incomes (given wages have remained stagnant over the last decade). This divergence in income and cost can mean that the most basic expenses cannot be met.

3. Emergencies.

In an emergency (family, medical, personal or whatever unexpected issue you face), you may need to borrow money to pay for unexpected costs. These types of emergencies are usually urgent and require payment as soon as possible. However, debt can be your only option if you don't have any emergency savings.

Getting into Debt to Meet Short Term Living Costs - Debt Options

What Type of Debt is Available?

There are several types of debt that New Zealanders can take out to meet short-term living costs:

1. Credit cards

Credit cards are an easy and accessible way to borrow money, as you can use them to receive purchases now and pay for them later. However, they often come with high-interest rates, so it's important to be careful about how much you borrow and to pay off the balance as quickly as possible. Our guide has a link to the best credit cards currently available, as well as low interest credit cards if you're unlikely to repay the balance within a month of incurring the costs.

2. Personal loans

Personal loans are unsecured loans often used for various purposes, including meeting short-term living expenses. They usually have fixed interest rates and repayment terms, making it easier to budget and plan for repayment. Our detailed breakdown of personal loans shows the options available.

3. Payday loans.

Payday loans are short-term, high-interest loans that are intended to be paid back when you are next paid. They are typically available to people with poor credit and are meant to be used for emergency expenses. However, they are expensive and are not a good solution to financial problems. MoneyHub takes a dim view on payday lenders; our comprehensive breakdown explains what you need to know.

4. Cash advance loans

Cash advance loans are short-term loans that allow you to borrow a small amount of money, typically for a few weeks or months. These loans are often advertised as a way to cover unexpected expenses or emergencies and are typically offered by non-bank lenders.

The Financial Markets Authority (FMA) regulates cash advance loans in New Zealand. The FMA sets rules for lenders to ensure that borrowers are treated fairly and that loans are offered responsibly. For example, lenders must disclose the terms of the loan, including the interest rate and any fees, and must not lend to borrowers who cannot afford to repay the loan.

It's important to know that cash advance loans can be very expensive, with high-interest rates and fees. They may also have strict repayment terms, requiring you to repay the entire loan plus interest quickly.

When considering a cash advance loan, it's important to consider the terms carefully and whether you can afford the loan before agreeing to borrow. It may be more cost-effective to explore other options, such as borrowing from a bank or credit union or seeking assistance from a non-profit organisation.
Check out our guide to cash advances for more information.

5. Overdraft accounts

An overdraft arrangement with your bank allows you to borrow money from your account when you don't have sufficient funds available. Overdrafts are typically available on checking accounts and are intended to be used for short-term borrowing. Our guide to overdraft accounts has more details.

6. Buy-Now-Pay-Later (BNPL) services.

Buy-Now-Pay-Later companies allow you to borrow money to purchase goods, such as furniture or appliances, and pay for them over time. Generally, using these platforms is free, assuming you make the instalments on time. However, note that there may be additional fees or late charges if you don't make your payments on time. Reviews of Afterpay and Zip explain more.

Getting into Debt to Meet Short Term Living Costs

Should I Get into Debt to Meet Short-Term Living Costs?

Before making any decision, there are several things to consider when deciding whether to get into debt to meet short-term living costs:

Interest rates: Before getting into debt, you must understand the interest rate on the loan you'll be paying. Higher interest rates can significantly increase the total amount you'll need to repay, making it more difficult to pay off the debt in the long term.
Repayment terms: It's also important to consider the loan's repayment terms. For example, how long will you have to pay it back? What are the minimum monthly payments? Can you afford to make these payments on top of your other bills and expenses?
The purpose of the loan: It's important to consider why you need the loan in the first place. For example, are you using it to cover essential living expenses, or are you using it to make a non-essential purchase? If you're using the loan to cover essential expenses, taking on debt in the short term may be necessary. However, if you're using it to make a non-essential purchase, it may be better to save money and avoid debt.
Existing debt obligations: Before considering taking on more debt, it’s important to map out how much debt you already have (both interest-bearing and interest-free). This existing debt balance can include anything from student loans to outstanding credit card balances. The more debt you already have, the higher your existing interest amount you’ll be paying each month and the less likely you’ll be able to take out additional debt.
Alternatives to borrowing: Before getting into debt, it's worth considering whether any alternatives to borrowing might help you meet your short-term cost of living expenses. For example, could you cut back on non-essential expenses to free up some extra cash? Could you negotiate with your creditors to temporarily reduce or postpone your payments? Could you sell some of your possessions or take on a part-time job to generate extra income?

What are the Key Risks of Getting into Too Much Debt, and How Can I Get Out of Debt?

It's important to recognise the risks of getting into too much debt. There are several key risks of being too highly leveraged, including:

Too much debt can lead to financial stress, impacting your mental well-being.

Too much debt can lead to financial stress, as you may have difficulty making monthly payments or affording other necessities. In addition, this debt can lead to feelings of anxiety and worry and can have negative effects on your overall well-being.

Impact on your credit score.

If you have too much debt and struggle to make your payments on time, it can damage your credit score. In addition, a low credit score can make it more challenging to get approved for loans or credit cards in the future and may result in higher interest rates if you are approved and ultimately increasing everyday borrowing and credit costs.

Difficulty saving for the future.

If you’re paying a large portion of your income towards debt repayment, you’re unlikely to be able to increase your savings and put away money for important goals like retirement, building up an emergency fund, or buying a home.

Increased risk of bankruptcy.

In extreme cases, having too much debt may lead to bankruptcy, which can have serious long-term consequences for your financial situation and credit score.

Difficulty taking on additional debt in the future.

Generally, the more debt you have, the more you're at risk of defaulting on your debt. Therefore, the more debt you have, the less likely a bank can offer you additional debt. This situation can be particularly difficult for Kiwis as the people who need to take the debt out to meet short-term living costs are also already in debt.

How can I get out of debt?

If you're struggling to pay down your debts, there are a couple of steps you can take to try to get out of debt:

Create a budget for your current expenses.

A budget can help you to understand how much money you have coming in and getting spent each month and can help you to identify areas where you can potentially cut back on expenses. The more you can cut back, the more money you can put towards savings or paying down your debt. Our guides to budget planners and budgeting apps are popular starting point.

Prioritise paying down your highest interest rate debts first.

If you have multiple debts, it may be helpful to prioritise them based on the interest rate, with the highest interest rate debts being the most important to pay off first. The more debt you pay down, the more money you can save through interest savings.

Consider declaring bankruptcy only as a last result.

Declaring bankruptcy is one way to "get out of debt" but it comes at a huge personal cost. In some cases, bankruptcy may be the best option for some Kiwis crippled with insane debt levels. However, it's important to know that bankruptcy can have long-term consequences, including a damaged credit score, the inability to operate a bank account without supervision, and difficulty borrowing money. Generally, it's recommended that Kiwis try to meet their ongoing debt obligations and pay off as much debt as possible. Therefore, declaring bankruptcy should be a last-resort option for many. Our guide to bankruptcy has more details.

Pros and Cons of Taking out Debt to Meet Short-Term Living Costs

Pros:

There are a few potential benefits to taking out debt to meet the short-term cost of living expenses:

Quick access to funds: If you need money quickly, borrowing can be faster than saving up or selling assets. Additionally, taking on debt can mean you can maintain your existing investments without selling at non-ideal times (such as when the stock or housing market has crashed).
Flexibility: Different types of debt have different repayment terms and interest rates, which can give you flexibility in how you pay off the debt.
Credit building: If you make your debt payments on time and in full, it can help you to build a good credit score, which may make it easier for you to borrow money in the future.
Ability to make necessary purchases: If you need to make an essential purchase, such as a car or a home, borrowing money may be the only way to afford it.

Cons:

There are also several potential risks and downsides to taking out debt to meet short-term living costs:

Interest expense: Borrowing money usually means paying interest, which can significantly increase the total cost of the debt.
Increased debt burden: Debt repayment can be a burden, particularly if you have a lot of debt or if your income is limited.
Impact on your credit score: If you default on a loan or make late payments, it can damage your credit score, making it more difficult and expensive to borrow money in the future.
Increased risk of losing your assets: Many debts can come with collateral that you need to put up (for example, your house is put up as collateral when you take out a mortgage). If you borrow money and cannot make your payments, you may risk losing your assets, such as your home or car.

Borrowing to Meet Short Term Living Costs Facts

Must-Know Facts about Taking Out Debt to Meet Short-Term Living Costs

1. Young Kiwis may be more able to handle higher mortgage repayments than older Kiwis.

While younger Kiwis may only be a few years out of university, have less responsibility, more flexibility (ability to move jobs and locations more frequently) and a higher ability to tolerate austerity (through downgrading spending or reducing costs), this is often not possible for older Kiwis that have dependants (children or older parents to take care of), large mortgages or significantly higher fixed costs such as insurance.
Additionally, many life events that happen later in life can significantly impact older Kiwis' finances (such as divorce or death).
Additionally, the older you get, the less likely you are to be able to refinance your mortgage. For example, banks are generally less inclined to lend to older Kiwis (50+ years old) on longer timeframes given the shorter expected working life. In contrast, younger Kiwis (25-40 years old) looking to take out debt, a mortgage or refinance their existing home loan will likely have no trouble financing a mortgage based on an estimated 30-year repayment period.
Generally, banks are aware that the earning potential of most Kiwis will peak around 50. This fact influences the forecasts that banks will use for mortgage calculations.

2. Given many banks' increased regulatory scrutiny, it may be significantly harder to take out new debt.

Given the stark rise in OCR and corresponding interest rates since 2020 and 2021, many banks will take a defensive stance regarding new lending.
This change in loan policy can mean that getting into debt (e.g., access to credit) may be much more difficult than previously expected.
A bank may be much more likely to scrutinise your income, expenses and credit history before approving your request to take out debt. Expect that the process to apply for credit cards or other revolving credit facilities will be much longer than before.

3. Plan out your current budget and debt with a budget advisor before taking on any additional debt.

For many struggling to make ends meet, getting into more debt can seem like a plausible solution. However, many Kiwis are already in some form of debt, whether through student loans, credit cards or mortgages.
Changes in the OCR will likely flow through all debt rates, including credit cards.
It’s essential to run the updated numbers on your existing debt balances to fully understand how much your current debt is costing you (and how much interest you’re forecasted to pay in the near term) before applying for new debt. Our guide to debt help lists budget advisory services that are free and operate in all corners of New Zealand.

4. Get in touch with your bank as soon as possible if you know you're going to run into short-term living cost pressures.

It can be easy to "tough it out" and just keep your head down, hoping everything will work out fine. However, this can often lead to abrupt issues when Kiwis either run out of money at the end of the month or find out that their current incomes aren't enough to meet the increased mortgage payments.
If you think you're going to run into short-term cash flow issues, contact your bank immediately and let them know your current situation. A bank will typically have many customers struggling with short-term living costs. You can apply for hardship consideration and, if approved, a bank will have a variety of options or concessions that they can offer you, such as extending the term of mortgages, reducing weekly repayments or switching to interest-only for fixed periods.
Other options include adjusting home loans to different lengths depending on how long Kiwis are forecast to struggle with short-term living costs. Expectations of future interest rate rises will heavily influence how much interest you'll pay if you decide to stagger your home loan into different lengths.

5. Negotiate with your existing bank or creditors if you know you’re going to struggle with your upcoming debt payments.

If you're having trouble making your debt payments, it may be possible to negotiate with your creditors to reduce or postpone your payments temporarily.
However, this can lead to more severe challenges down the line. The earlier you can get in touch with your bank, the more likely they'll be able to assist you and generate a game plan to help you manage your debt.

6. If you’re overwhelmed, seek professional advice on debt management from a budget advisor

If your debts are overwhelming and you're struggling to manage them on your own, you may want to consider seeking help from a budget advisor. These professionals can help you to create a debt repayment plan and negotiate with creditors on your behalf. Our debt help guide outlines what you need to know and how they help.

Borrowing to Meet Short Term Living Costs FAQs

Frequently Asked Questions

What's right for you will take careful consideration - our list of popular questions below are listed to help you make an informed decision.

Is it okay to borrow money to pay for living expenses?

It can be okay to borrow money to pay for living expenses in certain circumstances, such as if you are facing unexpected expenses or if your income is insufficient to cover your basic needs. However, it's important to be careful about how much you borrow and make sure you can afford the loan payments.

What are some alternatives to borrowing?

Some alternatives to borrowing include cutting back on non-essential expenses, negotiating with creditors to reduce or postpone payments, selling assets, or taking on a part-time job to generate extra income.

Is it better to borrow from a bank or a payday lender?

It's generally better to borrow from a bank or specialised personal loan lender (or other reputable lenders) than a payday lender, as payday loans tend to have very high-interest rates and are not a good long-term solution to financial problems. Banks and other reputable lenders may offer lower interest rates and more flexible repayment terms, making it easier to pay off the debt over time.

Is it possible to negotiate with creditors to reduce or postpone payments?

Yes - we suggest considering making hardship applications and working with a budget advisor. Negotiating with creditors (people you owe money to) to reduce or postpone payments is possible if you're facing temporary financial difficulties or cannot make your regular payments. It's important to communicate honestly and openly with your creditors and to provide documentation of your financial situation, and act as soon as possible (rather than avoid the problem).

What are the consequences if I default on a loan?

If you default on a loan, it can have serious consequences, including damaging your credit profile, making it more difficult to borrow money in the future, and potentially leading to legal action or the loss of assets such as your home or car if the loan is secured. Therefore, it's important to make every effort to pay off your debts as agreed to avoid default.

What other factors should I factor in when looking at my debt position holistically?

The top three things to consider when managing your debt balances include the following:

Interest rates: Different types of debt have different rates, and the rate you pay will depend on the lender, the type of debt, your affordability and your credit profile.
Credit score: Your credit score is a rank of your creditworthiness based on your credit history. It can affect your ability to borrow money and the terms of the loans you are offered. Note that the more debt you take on, the more likely you may miss payments or default (which will impact your credit score).
Debt-to-income ratio: Your debt-to-income ratio measures how much debt you have relative to your income. It's important to keep your debt-to-income ratio low, as high debt levels can make it difficult to borrow more money or qualify for loans with favourable terms. Conversely, the more debt you take on, your debt-to-income ratio will be higher.

I’ve already got a significant amount of debt but don’t have any other options. I’m worried about a lot of things (job, family, health, rising costs) and it’s getting all a bit too much. What can I do?!

The first thing to acknowledge is that what you’re feeling is completely normal. It’s an extremely tough time for Kiwis right now and it can feel like there’s no way out. However, you’ve taken the first key step towards getting into a better position by acknowledging where you currently are.

We’ve crafted a definitive guide to get help with debt with all the relevant resources to clearly identify your financial situation, manage your debt and get the right help. We strongly suggest reading it in detail.

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