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Is debt consolidation the right choice for me?

Debt consolidation loans could help people who are struggling to keep on top of their finances, but here are five points to keep in mind.

3 minute read

It can be all too easy to get bogged down under debt in the modern world. Debt that made perfect sense at the time can suddenly seem overwhelming when the payments for credit cards, loans, hire purchases, Buy Now Pay Later, and store cards are all due at once.

If you’ve been struggling to keep on top of things, a debt consolidation loan might be something to consider to bring some order back to your finances. But you need to do your homework first – follow our five pointers on debt consolidation to check if it could be right for you.

1. What is a debt consolidation loan?

Debt consolidation is quite simply the process of bringing multiple sources of debt into a single, easier to manage loan. It will mean that you will have one repayment to make instead of multiple. You could consider refinancing or consolidating any higher interest debt you may have (e.g. credit cards, personal loans, or overdrafts) onto a lending product with a lower interest rate and potentially over a longer term, which could reduce your payments. If you're a BNZ customer this option is available as either an Advanced Personal Loan¹ or Home Loan Top-up². Some of these options could result in you paying more interest over the term of the loan, so you'd need to think carefully about your options and if you need it, seek advice either from an organisation such as Money Talks or consider seeking independent financial advice

Tip – Do your maths and be realistic about what a debt consolidation loan can do for you. Life could be easier with a single repayment each month, but make sure you can afford the new repayment amount.

2. Is there anything special about a debt consolidation loan?

A debt consolidation loan is simply a new loan, large enough to cover all or part of your smaller debts. You take that freshly borrowed money, pay off all your small debts and begin paying the new one. Like any loan, approval isn’t guaranteed so you’ll need to talk to your bank and find out what’s possible.

Tip – Discipline is key to making a debt consolidation loan work for you. If you’ve taken out a debt consolidation loan, it’s important to not take out any other loans or credit cards otherwise soon you may be over-committed and back to square one. 

3. What types of debt consolidation are there?

Debt consolidation loans can be set up as a personal loan, or if you have a home loan, you can look at a top-up. There’ll be an application and approval process before you can begin the process of paying off the other debts. Both options have various payments cycle options and a payoff date, and this allows you certainty of timeframe of when your debts will be paid off. Personal loans usually have a variable rate applied to them, meaning the rate can go up and down, and they generally don't have an early repayment charge giving you more flexibility to pay the debt off early if you are able to. Home loans can be fixed rate or variable, allowing you to add more certainty if you need. 

You can find further details on each option available at BNZ on the main page of our website under the Home loans and Personal loans sections.

Tip – For personal loans, use our online calculator³ to help you see exactly how a debt consolidation loan could help you get out of debt. 

4. Watch out for unexpected fees

When applying for a debt consolidation loan be sure to check with the lender what fees are involved. Most loans attract some kind of loan processing fee and there may be others. Ensure there are no nasty surprises down the line by asking for a full breakdown of all costs involved including what you might have to pay if you miss any payments.

Tip – Choose your terms wisely. It may be tempting to choose the longest term available for your new loan, however, if you think you can afford to pay a bit more each month over a shorter term, you may save more in interest in the long run.

5. Find out if early repayment costs will affect you

Before you take out a debt consolidation loan, it’s important to check with all your existing lenders exactly what costs may be involved in paying them off. Some loans will charge extra for early repayment. These costs are often calculated based on the amount of money still owing and the amount of time left in the term. Contact all your lenders and ask them to calculate the exact amount you’ll be required to pay to clear the debt – it’ll almost always be different to the outstanding balance you see on your statement due to interest waiting to charge and break costs.

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¹$50 establishment fee applies. To apply for an Advanced Personal Loan, you must be 18 years or over and be a permanent NZ resident.

²Up to $100 top up fee may apply. Loans to purchase or finance other property or lending involving new and/or exchanged security are not considered home loan top-ups.

³Calculations are indicative only. T&Cs apply.

BNZ lending criteria, terms and conditions and fees apply to BNZ products

This article is solely for information purposes. It’s not financial or other professional advice. For help, please contact BNZ or your professional adviser. No party, including BNZ, is liable for direct or indirect loss or damage resulting from the content of this article. 

References to third party websites are provided for your convenience only. BNZ accepts no responsibility for the availability or content of such websites.