Your guide to debt consolidation

Debt consolidation

Credit card balances, a buy-now-pay-later account, a personal loan and a hire purchase agreement - it is not unusual for New Zealanders to be juggling several credit commitments at once, each with its own repayment date, interest rate and fees.

A debt consolidation loan is one option people consider when they want to simplify things. This guide explains how it works in New Zealand, what lenders assess, what it costs, the alternatives worth weighing up, and the questions to ask before you apply.

What is debt consolidation?

Debt consolidation means taking out a new loan to pay off two or more existing debts. The result is a single loan, a single lender, and one regular repayment instead of several.

In New Zealand, consolidation is typically done through a personal loan from a bank, credit union or non-bank lender. The new loan pays out the existing balances, and you repay the consolidation loan over an agreed term. Homeowners sometimes consolidate through their mortgage instead - covered further down, because the trade-offs are different.

The concept is straightforward. Whether it makes financial sense comes down to the numbers: is the total cost of the new loan lower than the total cost of carrying on as you are?

Before and after: what actually changes

Could debt consolidation save you money?

The answer depends on the total cost of your current debts compared with the total cost of a new consolidation loan.

A consolidation loan may make sense if it can:

• Reduce your overall interest cost.
• Simplify multiple repayments into one.
• Give your debt a defined end date.
• Improve your weekly or fortnightly cash flow without significantly increasing the total cost.

Use our Loan Calculator to estimate repayments based on your own loan amount, interest rate and term.

When comparing your options, look beyond the weekly repayment. A lower repayment achieved by extending the loan term may cost more overall because you'll pay interest for longer.

How we assess whether consolidation is right for you

When we assess a consolidation loan, we don't just look at whether we can get an approval.

We compare:

• Your existing interest rates and loan terms
• Remaining balances
• Current repayments
• Any establishment or early repayment fees
• Whether consolidating would reduce your total borrowing costs or simply spread repayments over a longer period.

Sometimes consolidation genuinely saves money. Sometimes it doesn't. If we don't think you're likely to be better off, we'll tell you.

How the process works, step by step

1. List everything you owe. Include each balance, interest rate, remaining term and any early repayment fees on your existing loans.
2. Check your credit file. You can do this free through New Zealand's credit bureaus. It's useful to know what a lender will see before you apply.
3. Compare the total cost. Look at the total amount repayable if you keep your existing debts versus consolidating them into a new loan, including any establishment or early repayment fees.
4. Apply through the right channel. You can apply directly with a lender, or through a licensed financial adviser who can compare your application across multiple lenders. Rather than completing multiple applications yourself, an adviser can often identify the lenders most likely to suit your circumstances before an application is submitted.
5. Assessment and approval. If approved, the lender will usually pay your existing creditors directly, or provide the funds for you to do so. The facilities being consolidated are typically closed as a condition of the loan.
6. Repay the new loan. Make your repayments on time and avoid taking on new credit while you're paying down the consolidation loan.

Debt consoldiation - What to watch

What lenders assess

Under the Credit Contracts and Consumer Finance Act (CCCFA), every lender in New Zealand must be satisfied that a loan is suitable and affordable for you before approving it. For a consolidation loan, that assessment typically covers:

• Income - employment type, frequency and stability
• Living expenses - your actual outgoings, verified against bank statements and benchmarks, not just what you declare
• Existing commitments - all current loans, leases and credit facilities, including the ones being consolidated
• Credit history - how you have managed debt to date

Lenders verify this through bank statements, and increasingly through secure electronic statement retrieval. That is standard for all consumer credit in New Zealand, not specific to consolidation.

Homeowners: Consolidating through your mortgage

If you own a home, adding short-term debts to your mortgage can look attractive because mortgage rates are typically lower than personal loan or credit card rates. The catch is the term: debt spread over the remaining life of a mortgage can cost more in total interest than it would over a shorter personal loan term, despite the lower rate.

If you take this route, the way to avoid that outcome is to keep your repayments at the higher combined level rather than letting them fall to the new minimum - so the additional lending is cleared quickly rather than over decades.

Sorted’s guide to debt consolidation covers this trade-off well, and your mortgage lender can model it for your situation

Who consolidation may suit - and who it may not

Alternatives worth considering

• Repay in place, highest rate first - if you can meet current repayments, directing any spare money at the most expensive debt first may cost less than consolidating. Sorted’s free debt calculator can model this.
• Hardship variation - If unexpected circumstances (illness, reduced hours, separation) have affected your ability to pay, you have the right under the CCCFA to ask any existing lender to restructure your repayments.
• A financial mentor - MoneyTalks (0800 345 123) is free and confidential, and can help you compare all of these options, including access to community no-interest loan schemes where they fit.

Using a licensed financial adviser

A licensed financial adviser who arranges lending can assess your situation once and compare it against a panel of lenders, rather than you applying to each lender separately - with each application recorded on your credit file. Nomu Finance Limited is a licensed Financial Advice Provider (FSP1011169). We can assess your position, explain your options, and submit an application on your behalf where consolidation looks appropriate. If it does not, we will say so.