What is Debt Consolidation and how does it work?

What is Debt Consolidation?

Debt consolidation is the act of combining all of your existing debts into one easy to manage loan.

Doing so saves you money as you'll be paying a much lower interest rate than you are now. It also makes it easier to manage your finances as you only have the single monthly repayment. No more juggling paperwork for multiple debts or sending payments to numerous creditors. It's that simple. 

How does it work?

Managing your debts isn’t easy. You have multiple loans, debts, and credit cards. Each with varying interest rates. All due on different dates, with payments being sent to different accounts. It's enough to drive the average Kiwi crazy.

Thankfully, consolidating your debts makes it easy to rid yourself of this financial burden.

In fact, it’s a process that you can complete in just 3 easy steps:

  1. Gather together all of the documents, paperwork and relevant information you have on your current debts and loans. Such as NZ credit cards, vehicle financing or personal loans.
  2. Calculate how much money you currently owe on all of your debts combined. While it can be difficult to face the facts, knowledge is power, so empower your financial self by working out just how much you owe.
  3. Apply for a debt consolidation loan and, once approved, pay out all of your currently outstanding debts.

That’s it! Simple, right?

You’re now ready to leave the burden of your debts behind and reap the benefits of debt consolidation and the many ways in which it can make your life easier. With just one loan to repay, and just a single monthly repayment to manage, you’re now free to get back to living your best financial life.

An example of debt consolidation in action

So now you know just what debt consolidation is, as well as how it works. That’s all well and good, but how does it work for you or your family out there in the real world? That’s a good question. In the following example, we’re looking at just how much a debt consolidation loan can help the average New Zealander just like you pay down their debts and live a stress-free financial life.

  • Name: James
  • Nationality: New Zealand
  • Age: 33
  • Occupation: Store owner
  • Scenario: Consider James. He’s a 33 year old store owner from Hastings, NZ. He’s married, with two kids, and earns what many would consider to be a decent income. Yet like most New Zealanders, he’s currently paying back a number of loans he’s accumulated over the years. $15,000 in loans, to be exact. These include a credit card, as well as a few personal loans spread across a number of different creditors, each one with a different interest rate and payment date. What a headache!

The Debts:

  • A credit card, currently maxed out at $7,500, charged at an annual interest rate of 17%.
  • A car loan of $6,500, charged at an annual interest rate of 18%.
  • A $1,000 loan for a holiday the family enjoyed last summer, charged at an annual interest rate of 13%.

How did consolidating debt help James with his finances?

Running the math on James’ debts, he currently pays - on average - 16% interest each and every year. But it doesn’t have to be this way. By consolidating his debts, James could quickly and easily roll all of these individual loans into one. This would save him the stress of having to remember - and plan ahead for - various due dates, give him extra time to pay it off, as well as save him money with a much lower interest rate.

Want to know your options?

Try our debt consolidation calculator.