In a world filled with subscription-based everything, it gets hard to keep track of what payments are coming out of what account and when. If you miss a Netflix payment, your account will be suspended until you pay the bill. But if you miss a loan or credit card payment, you have to deal with the ongoing damage it has on your credit score. That’s why it’s so important to manage finances properly. So let’s explore what your options are and answer the question ‘is debt consolidation worth it?’.
- Debt consolidation meaning
- How do debt consolidation loans work?
- Average debt consolidation interest rate
- Does debt consolidation hurt your credit?
- How to consolidate debt
- Pros and cons of debt consolidation
- Is debt consolidation a good idea?
- Need to talk to someone about your debt consolidation options?
Debt consolidation meaning
A debt consolidation loan rolls your existing debt/s into one recurring payment. This can include things like debts from other loans, bills, or credit cards. A single payment can make it easier to manage your debts and prevent dishonoured payments.
What is an unsecured debt consolidation loan?
Unsecured debt consolidation loans do not use any physical asset as security for the loan. There is an increased risk to the lender because there is no collateral attached to the loan. Because if you default on your loan then there is no way for them to recoup their loss, except in a court of law. This is why unsecured loans for debt consolidation tend to have higher interest rates compared to secured loans.
How do debt consolidation loans work?
The general process of debt consolidation is as follows:
- You apply for a new loan for the purpose of consolidating your debt.
- If approved, the lender pays out your existing loans for you. You can also use them to pay off any credit card debt or other payments.
- You now do not need to pay your old lender/s anything more and only have one loan payment agreement to manage.
Average debt consolidation interest rate
Swoosh interest rates for debt consolidation loans range from 8.95% (p.a.) to 24.95% (p.a.), based on your personal circumstances.
Read more about our rates and fees for personal loans.
Does debt consolidation hurt your credit?
The good news is that debt consolidation won’t hurt your credit score. In fact, it will likely help improve your credit score over time. By consolidating debts you only have to worry about making one payment on time. So it will be much easier to keep track of your finances. And help to avoid accidental missed payments over overdrawn fees.
Plus, you will be only paying one interest rate. Though keep in mind that you could end up paying more or less on interest, depending on the rate.
How to consolidate debt
There are a few different ways of consolidating your debt:
- Personal loan for debt consolidation
- Bad credit debt consolidation loan
- Balance transfer credit card
- Home equity
Personal loan for debt consolidation
The most common way to consolidate debt in NZ is with a personal loan for debt consolidation. The application process is generally quite straightforward and comes with a fast turnaround time.
Bad credit debt consolidation loans
The easiest and fastest way to get a debt consolidation loan is with a small loan for bad credit. Loans typically start from $2,000 and come with simple eligibility criteria They will generally have a high-interest rate compared to other options but are a fast way to consolidate debt if you need it done ASAP.
Balance transfer credit card
Some banks will offer balance transfer credit cards for a fixed period. You can merge multiple credit card debts into one at no interest for a set period of time, usually between 6-12 months.
You can roll your debt into your mortgage repayments using the equity you’ve built up on your home loan. This can be quite a lengthy process compared to a personal loan application and will increase your monthly mortgage payment. But you might get a better interest rate and not have to pay additional loan payments every month.
Pros and cons of debt consolidation
Breaking down the pros and cons of debt consolidation can help you decide if it’s a good or bad option for you and whether it’s worth it.
|Pros of debt consolidation||Cons of debt consolidation|
|Fewer repayments||Loan application may be rejected|
|Easier to manage debt requirements||Existing loans may charge early exit fees|
|May pay less on interest||Could end up with a higher interest rate|
|Opportunity to negotiate for a better interest rate||May need to pay a larger sum of money at one time instead of smaller amounts more frequently|
|Consistent monthly payment amount and due date|
Is debt consolidation a good idea?
So, after all that, is debt consolidation actually worth it? For many people, it can be! It depends on your circumstances. But if the struggles you are facing are to do with managing too many debts at once then consolidating them into one loan payment will make it easier to manage.
Debt consolidation can be a chance for you to get your finances back on track. Instead of juggling multiple loan payments, you just have one to keep track of. With fewer payments and a consistent payment amount, there won’t be as big a risk of missed payments.
On the other hand, if you don’t manage your debt correctly, you may find yourself with a lower credit score and still unable to make payments on time. If you are struggling with repayments, make sure you reach out to your lender as soon as possible. The lender can help figure out a solution that works for both of you. And they may be able to lower your payment amounts for a while, depending on your circumstances.