Should you get a personal loan for debt consolidation?

If you’re juggling multiple debts, getting a personal loan for debt consolidation could be an option for streamlining your repayments and reducing the amount of interest you’re paying.

Kiwis love their plastic. According to the Reserve Bank of New Zealand, the total spend on NZ issued credit cards for February was over $4bn and, as a nation, we are carrying $7.4bn of credit card debt – that’s around $1500 for every New Zealander.

Of course, if you pay off that debt at the end of your billing period, you’ll not incur any interest charges. However, unless you regularly pay off your credit cards in full, you can get caught in a cycle of snowballing interest charges, your monthly payments barely making a dent on your balances. If all this sounds too familiar, perhaps it’s time to look into consolidating your debts with a personal loan.

What is a personal loan?

A personal loan is a loan that you can use for any reason, such as buying a new car, financing a home renovation, paying for a holiday, or any other big-ticket household spending. You may also use it for debt consolidation.

Generally, you may borrow up to $70,000, but the interest rate varies widely, typically from around 7% to 20%. How much interest you’ll pay depends on several factors, including:

  • Your credit score
  • Your credit history
  • The loan amount
  • The lender’s standard rates

You can get approval for a personal loan in about two to three days, and receive the money on the same day as your loan approval.

How does a personal loan work when used for debt consolidation?

A personal loan allows you to roll several debts into one. These can include: credit card balances, store cards, and other personal or unsecured loans. You can’t include mortgages, student loans or secured car loans.

Debt consolidation has the following advantages:

  • You can potentially save hundreds, even thousands, of dollars over the long term if you obtain a personal loan with a lower interest rate than your outstanding debts. You can also avoid paying the annual fees attached to some credit cards.
  • Debt consolidation helps you manage your loans more efficiently. You only have a single loan to repay, and you no longer need to track several payments with different interest rates and loan terms.
  • A personal loan requires you to commit to a definite payment schedule, typically no longer than seven years. This compels you to be more vigilant in managing your debts.
  • If you choose a fixed-rate loan, you can better manage your budget by knowing how much to set aside for your monthly repayments.

What you should consider before applying for a personal loan?

To find out if a personal loan is a good option for you, you need to consider the following:

  • The number of debts you wish to consolidate.
  • The payback period. Always consider what is most feasible for you. Take into account your savings, your income, and your regular expenses, then determine how much you can afford to set aside for monthly loan repayments.
  • Whether to take a fixed rate or floating rate. The certainty of a fixed rate loan can help you better manage your finances, but it puts you at a disadvantage if interest rates drop in the future.

What should you should do before applying for a personal loan?

  • Personal loans are typically granted to borrowers with a good credit rating. The better your credit score and credit history, the more favourable the loan terms you can obtain. Check out our guide on how to check your credit rating.
  • Use Canstar’s Personal Loan Repayment Calculator to get an idea of the repayments you have to make and compare these against the repayments you’re making on your outstanding loans.
  • Consider the option of consolidating your debts through a balance transfer credit card. Compare the repayment amounts and terms you can obtain from both a balance transfer credit card and a personal loan. And always shop around for credit card or loan providers with the best terms. Click this link to compare credit cards with Canstar.
  • Check out Canstar’s Personal Loan Comparison Tool, which allows you to compare loan rates and terms from various providers.

 

Compare personal loans with Canstar

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