If you’re someone with multiple loans or lines of credit, then you may have heard about Debt Consolidation Loans. This type of personal loan can be a great way to pay down debt, simplify your debt arrangements and can even save you on interest repayments. To put it simply, a Debt Consolidation Loan means you can take out one loan to pay down other loans you may have. Typical loans or lines of credit that Kiwis have include credit cards, Buy Now Pay Later purchases, hire purchase agreements, interest free financing from retail stores for larger purchases, medical payment plans or other personal loans. This Debt Consolidation Guide will help you better understand Debt Consolidation Loans, whether it is worth you getting a Debt Consolidation Loan and the pros and cons of debt consolidation.
What is a Debt Consolidation Loan?
In essence, a Debt Consolidation Loan can enable you to take out one loan to pay off other debt. Ideally the Debt Consolidation Loan would have a lower interest rate than your other debts, so that you can pay off those debts faster. People are attracted to Debt Consolidation Loans to manage their debt for a number of reasons, namely:
- Simplify loan payment timing
Some people can find it confusing or overwhelming to manage multiple debt repayments. If your income is irregular, you forget to make your debt repayments, or you’re not entirely sure which payments are going out of your account when, it might make sense to simplify your debt repayment commitment to one single loan repayment each pay period. This can reduce feeling overwhelmed and make the debt obligation feel more manageable too. If you get paid weekly, fortnightly or monthly, it makes sense for your loan payments to align with when you know money will be coming into your bank account.
- Simplify loan amounts
Different loan amounts at different times of the month can take some planning and organisation to ensure you have money in the right bank account, at the right time. Knowing you have a single loan amount can be reassuring for some people – it’s a single amount to budget for.
- Payment terms
A Debt Consolidation Loan allows you flexibility around how often you repay the loan. This can be really helpful to ensure your loan repayments align with when you get paid. Remember, more frequent payments can reduce your loan interest expenses, so if you can make loan repayments more regularly, that’s great for your back pocket.
How To Guide: Is it worth getting a Debt Consolidation Loan?
How to consolidate debt? There are a number of considerations when it comes to applying for a Debt Consolidation Loan. We walk you through the key things you need to consider for your personal situation.
- Understand your debts
First things first, you need to understand your current debt position. Write down all your debts – the outstanding amount still to be paid, the interest rate you’re being charged, how often you’re making payments and how much the repayment amounts are. This should give you a good feel for your current debt obligation.
- Make a plan to get out of debt
Are there smaller debts or very high interest rate debts that you could pay off immediately to reduce your debt burden? If so, would a Debt Consolidation Loan make sense for your current debt situation? Use Nectar’s Debt Consolidation Calculator to work out how much you’d need to borrow, your likely interest rate, how often you’d like to make repayments, and over what time period. The calculator will provide you a repayment estimate so you can see if a Debt Consolidation Loan makes sense for your personal circumstances.
- Will a Debt Consolidation Loan fix your debt situation?
The Debt Consolidation Calculator should enable you to see if this is a better option for your debt scenario. If you’re unsure, contact the helpful Nectar team to talk through your financial situation and see how we can best help you.
- Debt Consolidation Loans and Credit Scores
A Debt Consolidation Loan may help you improve your credit score if you’re currently missing debt repayments. If a simplified single loan repayment will enable you to pay your loan and meet your repayment obligations, then it can absolutely help improve your credit rating.
Your credit score can also be improved by paying off and closing down any outstanding debts or credit facilities you may have. If you’re focused on improving your credit rating, we’d recommend not applying for other credit until you’re successfully repaid your Debt Consolidation Loan.
You can access your current credit score by using this free credit check tool.
- Benefits of consolidating your debt
- If you’re struggling to keep across multiple repayment amounts and a single loan repayment would be easier for you to manage.
- If the Debt Consolidation Loan has a lower interest rate than your current debt obligations,
- If the Debt Consolidation Loan would allow you to spread your payments over a longer period and reduce your regular payments.
- If a single loan commitment makes your household budgeting simpler.
- If clearing multiple debts with a single Debt Consolidation Loan will enable you to stay out of debt in the long term.
- Risks of consolidating your debt
A Debt Consolidation Loan is not always the best option. Consider the following when thinking about applying for a Debt Consolidation Loan:
- Will it enable you to pay off all your outstanding high interest debt or will you still have multiple loans to manage?
- Will you be able to manage the repayments on the new Debt Consolidation Loan?
- Will you save money on interest?
- Will a lower repayment amount, over a longer time period mean you’ll pay more in interest overall?
- Can you make early or additional repayments with no penalties?
- Before committing, what establishment fees or extra fees and charges does the Debt Consolidation Loan provider charge?
- If you’re close to repaying existing debt, do any additional fees make the Debt Consolidation Loan worthwhile?
How much can I borrow with a Debt Consolidation Loan?
With Nectar you can borrow unsecured up to $30,000, or as little as $2,000. Use our Debt Consolidation Loan repayment calculator to find out how much you could get. What’s more, our loans are unsecured and you won’t have any penalties on early repayments.
Getting started with Nectar
Need a great rate on a Debt Consolidation Loan? We’d love to help with your personal loan requirements. Check out how much you could borrow and learn more about our personal loans. You can get started with Nectar and get a personalised loan quote online which will include your interest rate, maximum borrowing amount and repayment options. Borrow better, faster today!*
*Nectar’s lending criteria and responsible lending checks apply.