Managing debt

Two effective ways to consolidate your debts

4 min read

Are you making 2018 your best financial year ever? Or, like many people at this time of year, are you feeling a little ‘shell shocked’ after a few weeks or months of spending? According to an article published in the New Zealand Herald last year, Kiwis were predicted to spend a whopping NZ$17 billion over the 2017/18 summer period alone!

No matter what time of the year, it’s easy to pay for travel, household bills, and socialising, etc., with money we don’t have by taking on debt in the form of credit cards and loans. Then, when the ‘smoke clears’, it dawns on us that, perhaps, we have ‘bitten off more than we can chew.’  If you’ve found yourself owing money to several providers, you may be struggling to meet payments and keep track of what you owe and to whom. To get things under control — and regain your peace of mind — think about debt consolidation.

What is debt consolidation?

Debt consolidation means taking out a new loan to pay off a number of liabilities and consumer debts, generally unsecured ones. In effect, multiple debts are combined into a single, larger piece of debt, usually with more favourable pay-off terms: a lower interest rate, lower monthly payment or both.

Sorry, it won't make your debts disappear; however, consolidation will simplify managing your debts because you have just one monthly payment to budget for, rather than several. Also, interest payments on a single, large loan can be less than that of several smaller loans combined, so you should save some money.

What are the options?

If you think consolidating your debt could work for you, there are a couple of options to consider:

What is a personal loan?

A personal loan is money borrowed from a bank or finance lender that you pay back in regular repayments of the same amount each month, over a period of anywhere between a few months to five years. This allows you to set regular payments that you can afford, and pay automatically each month. Some personal loans will also let you pay extra off your loan, or pay it off all together, with no early repayment charges or additional payment fees – so look out for this. It is an unsecurured loan, so you won’t have to put up property as collateral in the way you would for a mortgage. Interest rates vary, but can be similar to a credit card.

Things to watch out for

Most personal loans have a processing fee, so ask the bank for a full breakdown of the costs, including whether there is a fee for early repayment. Also, they come in many ‘shapes and sizes,' so take the time to understand all the features to ensure you get a loan that suits your needs best.

How to qualify

You’ll have to provide the bank proof of income, and this is easy to do by supplying payslips or bank statements that show your last three income deposits. When considering your application, your bank will also take into account your credit history.

What is a balance transfer to a credit card with a zero interest?

Like a personal loan, credit card debt is unsecured. The bank may provide you a credit card with an agreed credit limit and you can then transfer an outstanding balance or multiple balances to the credit card.

Currently, some banks offer low or zero interest rates on transferred balances to new or existing customers, which, of course, is a huge incentive. This means you could transfer your balance from a higher interest credit card (or cards) and pay it off without paying interest over that period. Be aware, though, that credit cards have revolving credit, so if you make more purchases on the new card, you’ll likely pay a standard purchse interest rate on those.

For more information we’ve written a detailed piece on Everything you need to know about Balance Transfers.

Things to watch out for

At the end of the zero-interest period any outstanding balance will move to the to the standard purchase rate, so be sure the rate is market competitive before making the switch.

How to qualify

Like with a personal loan, you must provide proof of income (payslips, bank statements, etc.), and the bank will check your credit history.

Which is best for you?

Both personal loans and balance transfers to zero-interest rates on credit cards offer the following benefits:

  • Easy to manage: All your debt is in one place with one lender. Through internet banking, you can view your balance and make repayments when you want to. 
  • Reduced cost: Borrowing money from one provider, instead of many, means payments should be lower on a monthly basis however overall cost (total cost of borrowing) could be higher. It all depends on the length of the loan term - the longer term the higher cost of borrowing.

If you are disciplined and not prone to impulsive spending, making the most of a balance transfer to a credit card with a zero interest is probably a great idea. However, be aware that every month one in three Kiwi credit card holders rack up interest by leaving their credit card debts unpaid. So, if you're not all that wonderful at managing money, a structured personal loan, which you can’t increase for extra spending, is likely the best option for you.