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Debt Consolidation Explained

Financial debt can creep up on us sometimes. A special ‘treat’ purchase on a credit card, a hire purchase arrangement for an urgent whiteware purchase, or a personal loan for a once in a lifetime event such as a family holiday or wedding. Before you realise it, you can have significant repayments needing to be made each week, fortnight or month outside your regular bills of rent/mortgage, groceries, utilities and petrol. When debt starts to feel overwhelming or out of control, there are ways to get back on track, financially. Some people simply want to simplify their repayments, rather than have to manage and keep track of multiple repayments going out of their account each week.

Nectar specialises in debt consolidation loans, which can help you simplify your financial arrangements and in some cases, reduce your debt levels with their competitive and personalised interest rates.

What is debt consolidation?

Debt consolidation is a way to proactively manage your debt. You’re able to combine your existing debt together under one loan which makes it easier to manage and plan for your required repayments. Sometimes, your debt consolidation loan can reduce your overall payments if you can secure a lower interest rate for your debt consolidation loan. Debt consolidation can sometimes extend your payment term too, so you have lower repayments over a longer period of time.

How does debt consolidation work?

By taking out a consolidation loan, specifically to combine multiple loans or credit card debt into one loan, you are effectively reducing your creditors to one single creditor. A single repayment each week, fortnight or month is much easier for many people to manage from a budgeting perspective, and less stressful than trying to ensure you have enough money in your account to cover multiple payments at different times of the month.

What are the benefits of debt consolidation?

The benefits of debt consolidation are well documented. Here are some of the key benefits you can enjoy by consolidating your loans, credit cards and other forms of debt into a single loan:

  • The potential for lower interest rates than your current debt arrangements, and the ability to spread payments over a longer payment term. Your regular repayments under your new debt consolidation loan could be lower than your current multiple repayments.
  • Budgeting is simpler due to managing one single regular repayment, rather than multiple repayments being made throughout the month.
  • People find that one payment is simpler to manage, thereby reducing missed payments that can result in late payment fees and fines.
  • Debt consolidation loans typically have lower interest rates than hire purchases and credit cards so can be a great option for these types of debt.
  • Reducing debt stress by being able to concentrate on a single repayment, rather than being overwhelmed by managing multiple repayments.
  • Focusing on using any surplus income to pay off your loan faster. 

Who should consider a debt consolidation loan?

Debt consolidation loans make great financial sense in certain circumstances. Here are some examples where it might make sense for you:

  • People with multiple debts, including credit cards, personal loans and hire purchases
  • People with typically high-interest debts such as credit cards and hire purchases
  • If you are struggling to keep track of your current debt repayments and have had issues with missing payments and incurring additional penalty fees in the past
  • If you are willing to make some changes to your current financial habits (ie. not incurring any new debt until your debt consolidation loan is repaid).

Does debt consolidation impact your credit score?

Your credit score or credit rating could be improved if you consolidate your debt. In New Zealand, any outstanding debts you have are typically reported individually to three credit reporting agencies: Centrix, Equifax and Illion. Whenever you miss a repayment, reports are sent to each agency which may negatively impact your credit score. 

By consolidating your debts into one loan, and paying off and closing outstanding debts can help improve your credit score by reducing the number of credit facilities that you have open. A debt consolidation can not only decrease your overall payments but may also send a message to your creditors that you’re committed to debt repayment and a more stable financial future. Credit reporting agencies may not look favourably on people that take out debt consolidation loans, but continue to incur new debt.

Keen to check your current credit score? This free credit check tool can help you. You can also check out more information about what credit scores are and why they matter.

How to apply for a debt consolidation loan

With Nectar’s seven-minute online application, you can apply and receive your personalised interest rate within minutes. Once you’re approved for your debt consolidation loan, you can have cash in your bank account the same day. Nectar offers unsecured lending of between $1,000 to $25,000. You can also choose the repayment schedule that suits you and when you receive your wages or salary into your bank account. Budgeting for your debt consolidation loan repayments couldn’t be simpler.

Risks of getting a debt consolidation loan

As with all finance arrangements, it pays to read and understand the fine print. Here are our top tips of things to be aware of when considering a debt consolidation loan:

  • Check for unexpected fees – make sure you understand any initial and ongoing fees before you apply. Nectar has transparent fees with a one-time establishment fee for your debt consolidation loan. Our website has full details of our rates and fees.
  • Long term repayment periods aren’t always the best option – you need to select a repayment term you can afford, but you do want to try and repay it as quickly as possible. Longer repayment terms can result in you paying more interest overall. Your goal should be to repay your debt consolidation loan as soon as you can.
  • Early repayment penalties – if you come into some extra cash, such as a bonus at work, or a small inheritance, you’ll want to repay your debt consolidation loan even sooner. Some providers will penalise you for early repayments, so make sure you understand whether you can make additional, early repayments or not. Nectar has a policy of no early repayment fees so you can pay your loan off sooner.
  • Using debt consolidation loans to help pay off your debts faster – debt consolidation loans are a great way to speed up your debt repayments, but only if you have good financial habits. You shouldn’t take on any additional debt while you pay off your debt consolidation loan. This will help you focus on repaying your debt consolidation loan and focusing on your overall financial health.

Keen to understand more about getting out of debt? We have a handy guide with some super useful tips for you!

Other debt consolidation considerations

Debt consolidation loans are effectively a restructure of your outstanding debts. Once you have a debt consolidation loan in place, small adjustments can really help you to get on top of your debt sooner. Adjusting your repayments from monthly repayments to more frequent weekly or fortnightly payments can help you to reduce your overall interest payments. Rounding your payments up to the nearest $100 or $1,000 can also be helpful – imagine if your fortnightly repayments changed from $234 each payment period to $300 per fortnight – how much more quickly could you repay your loan? 

Minimum repayment amounts are just that – your minimum required amount to repay. You should actively monitor your loan arrangements so that if you do get a salary increase or your outgoing expenses decrease, you can use this ‘extra’ money to repay your debt consolidation loan faster.

Improving your financial situation can be incredibly empowering. Once you’re debt-free you can focus on other financial goals such as saving up for a new car, holiday or your first home. Consolidating and reducing your debt is your first step towards long term financial freedom.

Getting started with Nectar

Do you have debts that need consolidating? We hope we’ve helped you understand how a debt consolidation loan could help you get your finances back on track. Check out how much you could borrow and learn more about our debt consolidation loans. You can get started with Nectar for an instant quote and rates. Borrow better, faster today!*

*Nectar’s lending criteria apply.