Debt consolidation

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Debt consolidation is a term we often hear bandied around, but many of us have only a vague understanding of what it means and why you would do it. To illustrate, if you had a car loan, a hire purchase agreement on a fridge, and amounts owing on credit cards or store cards, then you might want to consider bundling all of these debts together in one place, with one lender – this is called debt consolidation.

Why would you want to do this?

• To reduce stress – it is much easier to manage one loan, than lots of different loans with different payment dates and amounts.

• To save money – when you consolidate, ensure that you reduce the amount of interest you are paying by going to a cheaper lender.

• To speed up repayments – by simplifying your debts and reducing your interest costs, you should be able to repay your debt more quickly.

How do you do it?

Firstly, get all your paperwork together, including all the details of your existing debts, income and financial situation. If you don’t feel confident doing this by yourself, then get some free help from the friendly people at www.familybudgeting.org.nz .

Next, approach the cheapest lender you can find. As a starting point, it is always cheapest to borrow from a bank by securing the loan via a mortgage over your house. If you don’t have home equity available, then I still recommend talking to your bank first to see whether they can help you with a loan. If this is not successful, then your next port of call should be a reputable finance company.

What to look out for?

When consolidating your debts, be careful to address the following issues:

• Ensure that the interest rate you are paying is the cheapest you can get – shop around to make sure.

• Be wary of fees (application, loan processing fees, etc) that will increase the finance rate of your loan.

• Keep the term of the loan as short as you can possibly manage – the longer you stretch it out, the greater will be the total interest that you pay.

• Make sure you use a reputable lender – you don’t want to be taken advantage of by an unscrupulous loan shark.

For a list of a wide range of lenders, along with a current comparison of interest rates, take a look at www.interest.co.nz .

 

Please note that Kiwi Families is not intended to replace individualised, specialist advice that you receive from other financial professionals. Please seek specialist advice for your situation.

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