How to consolidate your debt

Co-author: Michelle Norton 

A credit card here, a store card there and throw in a car loan, too, for good measure. It’s easy to end up with more personal debt than we bargained for. 

Sometimes, consolidating all that debt, putting a regular repayment plan in place and making a fresh start can be the best way to go about minimising your debt.

So, what exactly is debt consolidation and what options do you have if you’re considering debt consolidation?

What is debt consolidation?

Debt consolidation is a form of debt refinancing that involves taking out one loan to pay off many others. For many Kiwis, rolling multiple debts into one monthly payment sounds much easier, however, it’s important to be aware of the pros and cons when it comes to debt consolidation.

What are your options?

Consolidate your debt using a credit card

One option is to transfer all your existing debt onto a single credit card.  In addition to making it easier to manage your debt by collecting it all into a single parcel, you can often pay back your debt at a lower interest rate.

Some financial institutions offer balance transfer deals, where you can transfer your outstanding debt onto a new credit card at a honeymoon rate (which may be 0%) for a certain length of time.

If you are considering this, though, you definitely need to think about the annual fee attached to the balance transfer card. Just because a card has a long 0% timeframe, it’s not necessarily going to be the best deal if it comes with a high annual fee.

Also, find out exactly how long the introductory rate lasts for, and how high the revert rate is after this time, otherwise you could end up just adding to your debt. And, don’t forget, this lower rate is just for the existing purchases, not for new purchases made on that card. 

To find the best credit card to help you with your debt consolidation, take a look at Canstar’s credit card comparison tool here

compare credit cards with Canstar

Consolidate your debt using a personal loan

Another debt consolidation option is to take out a personal loan.

Personal loans can be either secured or unsecured, and may offer a lower interest rate than credit cards.  Secured loans can use your house, car or other assets as security and, typically, have lower interest rates than unsecured options.  However, if you encounter financial problems and default on your new loan, you might lose your house or your car. 

Unsecured loans don’t use your assets as security, but usually have higher interest rates than a secured loan.  Further, these types of loans can be harder to obtain, particularly if you have a bad credit rating.

To compare personal loans, take a look at Canstar’s comparison tool here

Compare personal loans with Canstar

Consolidate your debt using a home loan

With the Official Cash Rate now just 1.00%, home loan rates are competitively low. If you have an existing home loan, you could potentially transfer your debt onto your mortgage.

However, there is a danger here that, despite minimizing your monthly repayments, you might end up paying off the debt over a much longer term, costing you more in the long run.  Fortunately, this can be avoided by paying more than the minimum each month.

If you are considering a home loan, be sure to compare the home loans available to find the type of loan that will best suit you. 

Compare home loans with Canstar

Despite all these options, it might make more sense to talk to your credit providers instead. Rather than consolidating, it can be more effective to leave your debts where they are and talk to each of your credit providers about repayment strategies. Credit providers don’t want you to default – that just loses them money.  Many providers will work with you to develop a repayment plan, which, depending on your personal circumstances, might be the most effective option.

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