Debt consolidation loans can help you make your existing debts cheaper. Our guide walks through the best options, alternatives and must-know tips to save you money on your debts.
Updated 5 March2024
Piling up debts cause massive stress for households of all income levels, and sometimes it can feel near-impossible to get on top of. With household borrowing at record levels, making debt affordable and manageable has never been more urgent.
Debt consolidationis a process that involves moving multiple debts into one debt, which is repaid with one single ongoing payment. 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. We cover:
- How Debt Consolidation loans work
- Debt consolidation options
- Calculating the right amount to borrow
- 10 Must-Know Facts
- Top Debt Consolidation Loans
- Debt Consolidation Loans - Frequently Asked Questions
Advertising Disclosure:We may receive a commission if you take out a loan, but this does not influence our shortlist. Interest rates vary based on each borrower, and because debt consolidation is non-standard lending, you will receive a personalised interest rate if your application is successful.
Know This First: How Debt Consolidation Loans Work
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. The savings come 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.
Know this: Changing spending habits is essential for a debt consolidation loan to be effective
- Debt consolidation isn’t a magic solution for debt problems. It won’t change your spending behaviour that created the debt in the first place.
- It also won’t help if you’re at a point of a debt crisis and don’t have the money to repay even at a lower level. If this is you, read ourDebt Help guideto understand your options.
Top Debt Consolidation Loans
Unlock Savings with MoneyHub's Trusted Debt Consolidation Loans - Avoid exorbitant interest rates and hefty fees.
- Our research has identifiedHarmoneyand/orFirst Credit Unionas standout lenders renowned for offering competitive interest rates to many borrowers.
- A quick, few-minute application could be your first step towards significant savings.
- Important:While we may receive a commission for loans taken out, our recommendations are unbiased and solely focused on your financial benefit.
- Interest rates are personalised, so check what these top lenders can offer you.
- Remember, the interest rate you lock in today can lead to substantial savings in your loan repayment journey. With debt consolidation, the potential to save is immense.
- Please take your time, compare wisely, and avoid the typical debt consolidation loan traps by knowing what you'll pay upfront.
Debt Consolidation Loan Options
There are two popular ways to consolidate debt, and one less popular way which is relatively risky.
All three move your debts into a single “easy to manage” monthly bill if organised correctly. The interest rate you pay and how long you repay will depend on the terms you agree with the lender. The options are:
- Apply for a Fixed Rate Debt ConsolidationLoan:The amount that is approved will pay off high-interest debts, leaving you with the obligation to make regular payments over a fixed period. Most debt consolidationloans give you the option of over-paying without penalty, meaning you can be debt-free faster.
- Apply for a Balance Transfer Credit Card:If you qualify for a 0% offer, your existing debts that are on cards (such as store cards, credit cards and long-term finance cards like GEM Visa and the Q Card)will become interest-free once they are transferred. You can then make monthly repayments to clear the balance for the term of the interest-free period. If you find yourself unable to get a 0% offer, there are several low-interest options with interest rates starting at 1.99% p.a.
- Homeowner Debt: If you're a homeowner, there is the option to ask your bank about anequity releaseor line of credit loan,known as a"Revolving Mortgage". This is a 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 drawdown, 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.
Know this: Which options are right for you depends on the amount of debt you have, the form of the debt (loan or card), your current interest rates and your budget to repay it.
Calculating the right amount to borrow
If you’re committed to reducing the amount of money you spend on repaying your debts, it’s essential to spend a moment up front to make sure you get the best possible deal. Our five steps make it easy:
- 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.
- 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.
- Allow for unexpected events:With the estimated repayment period you've calculated,multiply by 1.5 to account for theinterest costsand also togiveyou 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.
- 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.
- 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 ourbalance transfer credit card guideto get the best deal.
Best Debt Consolidation Loans
Debt Consolidation Loans - 10 Must-Know Facts to do it Right
Debt consolidation loans are relatively straight forward, but there are some must-know tips to help you get the best interest rate and right terms. We detail ten must-know facts below.
| Polish up your credit history BEFORE applying for a debt consolidation loanLenders 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. |
| Know debt consolidation loan limits BEFORE you applyLenders available today advertise the possibility of consolidating up to$70,000using an unsecured debt consolidation 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.
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| If your total personal debt exceeds 50% of your income, a debt consolidation loan (probably) isn't an optionHigh 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 debt consolidation loan. The deal you get will depend on your income and credit history. If your 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 loanYou 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. |
| Consolidating credit cards with a loan is a bad idea unless you don't qualify for a balance transfer credit cardExpensive credit card debt is best suited to balance transfer credit cards rather thana 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 totals $10,000 you could save up to $2,000 per year if the alternative were a debt consolidation loan with a 20% p.a. interest rate. As with any balance transfer, it’s essential not to run up new balances on the existing cards – cancelling them once the transfer is done is the best idea. |
| You must repay existing debts with a debt consolidation loan (i.e. you can't use the money for another purpose)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. |
| You need a plan to stop running up more debtThis is essential to stop the cycle of high-interest personal debt repeating itself. To give yourself the best chance, the following steps can get you on the right track:
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| Don't consolidate debts if you're close to paying them offIf 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. |
| Consider visiting a budget advisorBudget advisory services exist all over New Zealand, providing free-of-charge assistance to anyone needing help keeping their finances in order. Their services include helping you prepare a weekly budget, isolating spending habits you can eliminate all while providing a level of moral support. An appointment takes less than an hour and many have vast expertise in personal debt issues. Our guide to debt help has more details. |
| Stay strong and have will power as you make repaymentsFacebook groups for debt support provider moral support during the repayment process. Servicing debt is never fun, but being open about it with your family will lower the risk of adding new debt. Keeping track of how much you have to repay is a good way to stay motivated. |
Unlock Savings with MoneyHub's Trusted Debt Consolidation Loans - Avoid exorbitant interest rates and hefty fees.
- Our research has identifiedHarmoneyand/orFirst Credit Unionas standout lenders renowned for offering competitive interest rates to many borrowers.
- A quick, few-minute application could be your first step towards significant savings.
- Important:While we may receive a commission for loans taken out, our recommendations are unbiased and solely focused on your financial benefit.
- Interest rates are personalised, so check what these top lenders can offer you.
- Remember, the interest rate you lock in today can lead to substantial savings in your loan repayment journey. With debt consolidation, the potential to save is immense.
- Please take your time, compare wisely, and avoid the typical debt consolidation loan traps by knowing what you'll pay upfront.
Top Debt Consolidation Loan Offers
We outline the best current offers available. A popular tip is to check your credit score and credit history to make sure there are no errors that could hurt your application. Read our guide to credit scoresto know more.
Important:The interest rates stated below are the best offers - each borrower will be assessed for suitability, whereby an interest rate offer will be provided if the loan is approved.
This interest rate may be higher than those disclosed below.
Advertising Disclosure:We may receive a commission if you take out a loan, but this does not influence our shortlist. Interest rates vary based on each borrower, and because debt consolidation is non-standard lending, you will receive a personalised interest rate if your application is successful.
Best Debt Consolidation Loans - From around 10% p.a for 1-5 years
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Debt Consolidation Loan Alternatives
Debt Consolidation Loan Alternative - Balance Transfer Credit Cards - 0% p.a for 6 to 12 months
- Ourguide to balance transfer credit cards covers the best options offered by a number of banks, including BNZ and ASB.
Debt Consolidation Loan Alternative - Revolving Credit Mortgage
- If you have equity in your home, you may tap into it with the Revolving Credit Mortgage ("RCM"). This revolving account works much like an overdraft. You get access to your home’s equity (i.e. the money you've repaid on your mortgage) and can spend it how you want.
- The RCM becomes your ‘everyday account’ or the account you pay your bills with, use for daily spending, and even deposit your paycheck in, rather than your bank account.
- OurRevolving Credit Mortgageguide outlines must-know facts and the latest deals.
Debt Consolidation Loans - Frequently Asked Questions
To help navigate debt consolidation, our list of common questions anticipates what's important when it comes to getting debts in order.
How do I get the lowest interest rate on a debt consolidation loan?
Our best buy debt consolidation loanslist options ranked by the lowest interest rate - the better the applicant's credit history and ability to repay, the lower the interest rate. We frequently hear of MoneyHub users who have applied for a low interest rate debt consolidation loan and been offered something above even their most expensive debts.
Cleaning up your credit history (see below) and following a strict budget gives you the best chance of getting a lower interest rate.Do debt consolidation loans hurt your credit score?
It depends. If you make timely repayments, there will be
no effecton your credit score. If you are late with repayments, it is likely the lender will enter this on your records. Every situation is different - the general rule is that repaying on time (or early) is positive, and vice versa.
Is it a good idea to consolidate your debt?
It depends. If you can get a loan or balance transfer with a lower interest rate than you are currently paying, and the fees are low, debt consolidation is a good idea. If you are very close to repaying all of your debts, it may be an idea to continue to do so to avoid more credit applications and associated fees.
How much does it cost to consolidate your debt?
Fees range, but usually it will be a one-off loan application fee ($100 to $250 is the standard range), or up to $50 for the joining fee of a balance transfer credit card. There is also the cost of the interest, and any late payments incurred.
Can you get a debt consolidation loan with bad credit?
It depends. If your credit is particularly bad and you face being refused, our debt help guide lists community-based lenders that can assist with low-interest loans for specific purposes. Generally, the more troubled your credit history, the higher the interest you pay.
What is the best debt consolidation loan?
We have listed the top picks for debt consolidation loans below, ordered by interest rate.
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 can't pay back my debt consolidation loan?
If you are struggling to make repayments, you are best to talk to your lender. Ourdebt help guideoutlines the process of making a hardship application, whereby the lender looks at your finances and can freeze your repayments until you are financially stable.
What is the purpose of consolidating debts?
Debt consolidation loans are popular for reducing debt expenses by paying lower interest rates, and making debt management easier - you make one regular repayment instead of one for each debt you have.
Unlock Savings with MoneyHub's Trusted Debt Consolidation Loans - Avoid exorbitant interest rates and hefty fees.
- Our research has identifiedHarmoneyand/orFirst Credit Unionas standout lenders renowned for offering competitive interest rates to many borrowers.
- A quick, few-minute application could be your first step towards significant savings.
- Important:While we may receive a commission for loans taken out, our recommendations are unbiased and solely focused on your financial benefit.
- Interest rates are personalised, so check what these top lenders can offer you.
- Remember, the interest rate you lock in today can lead to substantial savings in your loan repayment journey. With debt consolidation, the potential to save is immense.
- Please take your time, compare wisely, and avoid the typical debt consolidation loan traps by knowing what you'll pay upfront.
Debt Consolidation Loans - 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, and repayments need to be a top priority to avoid running into trouble.
- Balance transfer credit cards are an excellent idea to move card debt - if you can bag a 0% interest rate deal, you're going to save hundreds or even thousands.
- Working with a budget advisor might seem like a foreign concept, but they are there to help and give you moral support you may not find elsewhere. There are professionals all over New Zealand who offer a free service.
- Avoiding new debt while servicing a debt consolidation loan or credit card is key to staying in control.
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