10 *top* tips for consolidating your loans & debts

Posted August 2017

Do you feel like debt is getting you down during the day? Stress keeping you up at night? Chances are, you’re not alone: more and more Kiwis just like you are finding themselves saddled with debt they just can’t budge.

By consolidating the money you owe, you'll ensure you're not stuck with a financially unfulfilling future. With the way this process works, consolidating debt isn’t just about taking out a loan, it’s also a way of thinking about - and approaching - the debts that you carry. Think of it as a super effective way to get your finances back on track, and start down the road to living your life free from financial stresses.

With a few simple strategies, tips, and techniques like the ones we’re sharing today, you’ll make your mind a little lighter, and your wallet a little heavier.

To start, let’s talk about savings:

1. Focus on the money you owe, first

Let’s face it, life has a way of surprising you when you least expect it, and not always in a good way! Unexpected medical bills? Car repairs? Emergency flights? For these reasons, it’s almost always a good idea to have an emergency savings fund ready for a rainy, or in this case stormy, day.

Note that we say ‘almost’, because there’s also little use in saving money when you have debts knocking at your door!

But why?

The reality is, even the best account for saving money pays just a few percent in interest, while the return on a fixed deposit is just a few points higher. On the other hand, you could easily be paying ten, fifteen, or even twenty percent on your debts each and every month. So while saving money is a good idea, in this scenario it'll cost you more than it saves.

Rather than set money aside, consider putting the money you would have thrown into a savings account towards your debts instead. You’ll save less cold hard cash in the short term, but over time you'll save many hundreds more in unpaid interest. 

2. Make the switch to cash

Whether it's a debit card, credit card, or app on your phone, it's easier now than ever to give in to your impulses and spend money you don't have. We're pretty sure you don't need us to point out that this is one sure-fire way to undo all of your good financial work.

Now is the time to start leaving your card at home, and instead make the switch back to cash. When you go shopping, for example, take out only as much as you need and not a cent more. You'll find that you're increasingly less reliant on your cards, which brings us nicely to our next point...

3. Cut up your credit cards

Once upon a time, credit cards were required if you wanted to shop online, or just really needed that new set of steak knives you saw on the shopping channel. You know, the ones that could cut a pineapple in half with a flick of the wrist! 

Anyways, today debit cards fill this role, and yet you probably still carry a credit card in your back pocket to pay for those things you really want now, but can't pay for until later.

The trouble here is that it's not always certain that you'll make the required payments before the interest-free period comes to an end. As we've discussed, life often has a way of getting in the way at the worst possible time, which could leave you paying high levels of interest on a purchase that seemed harmless at the time.

If you’re serious about consolidating your debts, it's high time you made the switch to cash and cut up your credit cards for good.

4. Be prompt with your repayments

There's a big difference between simply paying off your debts, and doing so effectively. Making a payment days or even weeks late, with late notices piled up on your counter, for example, is nowhere near as effective as making your payments when they're due.

For one, any late payments can incur fees, while also being recorded in your credit history where they'll go on to harm your credit score. You could also be facing increased interest rates or other penalties, depending on the kind of debt you're carrying.

To combat this, ensure you make payments on time. If you struggle to keep up with your debts, consider marking due dates in your calendar, or set up automatic payments. Better still? Take out a loan to cover the money you owe, so you only have the one monthly payment to manage.

Speaking of which...

5. Consolidate your debts with a personalised loan

If you find you're struggling to get your repayments under control, then a debt consolidation loan could be just the thing for you. Offering a much lower rate than you currently pay on your outstanding loans, consolidating your debts with secured or unsecured personal finance makes life easier.

There's no more paperwork to manage. No more repayment dates to mark in your calendar. Just one simple, easy repayment to make each month - and that's it! But where, exactly, is the best place to get an individual loan like this? 

6. Join a credit union

If you're set on consolidating your debts with a loan, the next thing you need to decide is which lender will offer you the best bang for your buck. A decision like this usually depends on whether you go with one of the big banks or a credit union.

More often than not, a credit union will be able to offer you a cheaper loan rate, as well as an increased chance of approval, especially if you carry a poor credit rating or are self-employed.

Ultimately, the choice is yours! Though sites like interest.co.nz and finance.co.nz are an easy way to compare your options.  

7. Tackle high-interest repayments first

Splitting whatever spare cash you have across each of your repayments may leave you feeling like you're getting on top of things.

But don't be fooled!

This is far from the most effective way to pay off your debts. Instead, look to pay off the smallest amount that you owe first. Or, in this case, the one that charges you the highest interest rate!

By knocking these high-interest repayments off your list first, you'll save yourself a whole lot of money in interest.

8. Cut down on excess spending

They say there's a time and place for everything, but perhaps the best time to spend money on an expensive wedding, an overseas trip, or financing a new car isn't when you're struggling to make your existing debt repayments. 

This isn't to say that you should never spend! Don't worry, we're not going to ask you to cut out your cups of coffee or avocado on toast. Far from it. Instead, what you should do is keep an eye out for any expenses that may have gotten away from you.

Do you have a Spotify subscription that you no longer use? A drunken New Year gym membership you've used once in the last eight months? This is excess spending you can easily reduce to pay off your debt that much quicker.

9. Create a budget...and stick to it!

We’ve discussed budgets at length in the past, but there’s a reason it’s worth bringing up again: it works.

By creating a realistic budget for you and your household, you'll be able to take stock of: 

• Your average household income and expenses.
• Where your money is going, and what it’s going on.
• Expenses that you can cut and redirect toward paying off your debt.

A budget also gives you something to work towards, which is a great way to incentivise the process. It's easy to say "I'm going to spend less!", but it's a hollow promise if you don't have a way to keep your spending in check!

By giving yourself a budget, you'll ensure you’re spending only as much as you need to and paying off your debts as quickly as you can.

10. Avoid making simple mistakes

Paying off debt is difficult enough, but did you know that you could be making it more difficult for yourself than it needs to be? As we discussed last month in our post '5 blunders to avoid when paying off your debt', there are many hurdles on the journey to living a financially independent life just waiting to trip you up.

To avoid any nasty surprises, learn from others' mistakes. Not only will you avoid tripping over yourself, you'll also make the journey to financial freedom as stress-free and straightforward as it can be.

Paying off debt doesn’t have to be difficult

Death and taxes may be the two certainties in life, but at this point, debt has to be a pretty close third. Yet just because it’s an everyday part of life for most New Zealanders, doesn’t mean you can’t buck the trend and live a debt-free life.

With the tips we’ve explored today - cutting down on spending, using cash, and consolidating the money you owe - you'll make the journey that much easier, and ensure you’re living your best financial life sooner rather than later.