Debt consolidation: When should I consolidate my debt?

Do you have a whole heap of little loans you struggle to keep track of?

It starts with a credit card, a personal loan, and maybe a car you bought on hire purchase. Suddenly, all these debts feel like a juggling act.

Payments often come out at random times throughout the month. It’s confusing ... and you might groan every time a payment comes out you weren’t expecting.

If this sounds familiar … you might want to think about a debt consolidation loan. This type of loan can combine all those scattered debts into one manageable loan.

In this article, you’ll learn what debt consolidation is and how it works.

This includes the pros and cons, and different types of loans. That way you decide if it’s the right choice for you.

What is debt consolidation?

Debt consolidation is when you combine a whole heap of smaller loans into one single larger loan.

So, instead of juggling several payments for different loans ... you just have one. This way, you’re left with one loan, and one monthly payment.

You may even find you can get a lower interest rate. That can reduce your minimum repayment, which improves your cashflow. Or, you can then decide to pay off your debts even faster.

Let’s say you have:

• $2,500 in credit card debt
• a $5,000 car loan
• a $1,500 personal loan used for a holiday
• $1,600 overdraft

All up you’ve got $10,600 in debt, owed to four different providers. To consolidate this debt, you’d take out a new $10,600 debt consolidation loan.

You’d then use that loan to pay off all of these debts. It’s the same amount of debt, but you’ve got just one loan rather than four.

What are the pros and cons of debt consolidation?

Debt consolidation has a couple of key advantages.

For starters, it’s simpler. With one consolidated loan you only need to manage one monthly payment. This makes it so much easier to track and budget for.

On top of that, you might get a lower interest rate on your consolidated loan.

Let’s say you have high-interest debts (like credit cards with 22% interest). Consolidating into a loan with a lower interest rate (like 14%) can save you money over time.

This means you’re potentially reducing how much interest you pay, but it doesn’t always work out that way.

Let’s say you’re paying off your credit card; it’s got a 22% interest rate and you plan to pay it off over the next year. If you take out a debt consolidation loan with a 14% interest rate, then great, you’ve got a lower rate. But, if you then pay off that new loan over 7 years, you’ll end up paying more in interest.

That’s because you’re taking 7 years to pay off the loan, rather than just one. On top of that, once you pay off your credit card (using the debt consolidation loan) it can be tempting to start spending on them again.

If you do that, you could land yourself in an even worse financial position than before.

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What are the different types of debt consolidation?

There are two main ways Kiwis consolidate their debt.

#1 – Standard debt consolidation loan

First, you have a standard debt consolidation loan.

This is the most common form, where you take out a loan specifically to pay off other debts.

The interest rate can be anywhere between 8 - 30%, with a typical loan term of up to 7 years.

It’s straightforward and you don’t need a house (or another asset) to borrow against.

#2 – When you use the equity in your house

If you own a home (and have some usable equity) you might increase your home mortgage and pay off your other debts.

For instance, if you owe $30,000 across various loans, you could get a mortgage top-up. That’s where you increase your home mortgage by $30,000, then you use that to pay off the debts.

Because it’s a normal home mortgage you can often get a much lower interest rate (e.g. 6%) compared to a normal debt consolidation loan.

Now, going from a 29% interest rate on your Gem Visa card to 6% on your mortgage might sound like a stellar deal. However, if you decide to pay off that debt over a 30-year mortgage term than you’ll be worse off.

This is because instead of paying that $10k lounge suite off over 3 years at 29%, you're now potentially paying it off at 6% over 30 years.

So, talk to your mortgage broker about how long you want to pay off the loan. It might be a good idea to keep paying off the debt over the same period (e.g. 3 years).

When should I avoid using debt consolidation?

Debt consolidation isn’t ideal if you have lots of low-interest loans (or even a 0% loan for 24 months). In this instance, consolidating your debt might increase your overall interest rate.

Sometimes, consolidating debt into your mortgage can work against your financial goals. If your goal is to buy an investment property, consolidating into your home loan increases your total mortgage debt.

This could reduce the usable equity you have to buy an investment property, so keeping debts separate might be wiser.

What are the costs involved in a debt consolidation loan?

When consolidating debt, there are a few costs to consider:

• Establishment fees: Lenders often charge an initial processing fee, ranging from $150 to $380, depending on the provider​
• Monthly fees: Some lenders charge account maintenance or repayment fees that can add up over time​
• Early repayment fees: Paying off your loan early may incur a fee to compensate the lender for lost interest
• Late payment fees: Missing a payment may result in additional fees, which vary by lender
• Other: Non-bank lenders may charge additional transaction or account fees​

Interest rates can also vary widely, typically ranging from 6.45% for secured loans to 24.99% for unsecured.

Where can I get a debt consolidation loan?

Most financial providers will offer a debt consolidation option.

If you Google “debt consolidation” there’s a multitude of choices. You’ll usually find the best option for you by comparing interest loans, hidden fees and flexibility in repayments.

#1 – Banks

Major banks such as ANZ, ASB, BNZ and Westpac offer debt consolidation loans.

ANZ offers a debt consolidation loan for between $3,000 and $50k, on 13.90% interest.

The loan term is between 6 months and 7 years.

#2 – Non-bank lenders

Some non-bank lenders specialise in debt consolidation, such as Harmoney.

Harmoney offers loans from $2,000 to $70k over 3, 5 or 7-year terms. Interest rates are fixed, and range between 9.89% to 24.99%, depending on conditions.

#3 – Credit Unions

You can also look at local credit unions, like Co-op Money or The Cooperative Bank.

Interest rates at the Cooperative Bank start from 8.99% up to 17.75%, depending on the borrower’s credit rating. A $155 application fee applies.

Should I get a debt consolidation loan?

A debt consolidation loan can simplify managing high-interest debt by combining multiple payments into one.

It can lower overall interest costs, but be cautious – it may end up more expensive in the long run if not carefully managed.

If you think it’s the right choice, compare offers and interest rates.

And it’s always good practice to speak to a financial adviser to assess your situation.