A little about debt consolidation loans

There are many finance companies and other loan companies that make a lot of money from “selling” debt consolidation loans, which is a process of refinancing loans and other debts you may have.

These finance companies will often “sell” their loans because your weekly repayments are lower, but they don’t always tell you that they will extend the term of the loan, they don’t tell you about the higher interest rates or the additional costs you will be charged.

People want to consolidate their debts to improve their financial situation and enable them to better manage their money; however, you also need to ensure that you don’t just extend the term of the loan with higher interest rates and more fees just to reduce weekly repayments.

The right reasons to consolidate debt

It’s easy to be weighed down with debt and as mortgage brokers we see a lot of people struggling to meet all of their loan payments. People may say that you should never have taken on so much short-term debt, but there are many situations where it happened and there’s no point dwelling too much in the past anyway. We need to deal with the debt you have now and consider if a debt consolidation loan is the right option.

The first thing a mortgage broker needs to do is get a position statement from you so they can identify exactly what debts you have. Only then should they assess which debts should be consolidated.

This decision to refinance debt is usually based on the interest cost you pay on each debt, the prepayment penalties (if any), the remaining term, and the actual repayment amount.

You should refinance IRD debt whenever possible as the interest and penalties can be extremely heavy, but why refinance an interest-free loan?

There are times when you can refinance an interest-free loan; however, you should carefully consider this in overall debt restructuring to make sure it’s the best thing to do – normally it wouldn’t be.

What if I have bad credit?

As mortgage brokers, we are approached a lot by people who are over-indebted and want to get a debt restructuring loan, but have bad credit and therefore think they can’t get a loan.

There are degrees of bad credit;

Some minor flaws in your Veda report – we’re looking at what these are and the reason they happened and generally if we can explain them the lenders will agree.

Larger defaults and judgments on your Veda report – we need a better explanation and we may be limited in the choice of lenders; however, there are several lenders including non-bank mortgage lenders that have options.

Overdue Loan or Mortgage – every new lender wants an explanation as to why the loan or mortgage is overdue and this could be the very reason we want to take out a debt consolidation loan.

Without looking at your personal situation, there’s no way to know if you can consolidate your debts if you have bad credit, but it’s definitely worth looking into. A debt consolidation loan is perhaps the best way to clean up your credit and manage your way back to “good” credit.

Watch out for the cost of debt consolidation loans

The cost of debt consolidation loans varies from company to company and depends on your situation and security. An unsecured loan will almost always be more expensive, so it is definitely worth considering using your vehicle or property to secure the loan and thus reduce the cost of the loan. You also generally pay more if you have bad credit and other situations where you fit outside the “ideal profile” set by the lenders.

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Comparison of loans for debt consolidation

It is extremely difficult to find the information to make a good debt consolidation loan comparison as many of the options available to you are based on a risk assessment that determines the rate of interest you should be charging.

The cost of a debt consolidation loan is normally;

The interest rate – while it is often difficult to find out what the interest rate is on debt consolidation loans, you should always ask and compare it to what you are currently paying as well as other options. Taken from their websites, GE Money quotes a sample 5-year loan with an interest rate of 19% and Finance Now quotes rates from 13.95% – from!

Easy Loans (NZ) say they will quote on a case by case basis, Geneva Finance, QuickCash Finance, Instant Finance and Max Loans have made no mention of rates that we could find.

The fees – many finance companies charge an incorporation fee and some also charge ongoing monthly fees and termination and/or early redemption fees.

Insurance – most finance companies will “sell” payment protection insurance with each loan. This is generally a very expensive way to purchase insurance and we recommend that you speak to an insurance advisor rather than opting for these options.

Our experience shows that many of the debt consolidation loans have interest rates between 20-30% with an incorporation fee and they would also include expensive payment protection insurance which would not be necessary if you already have your own income insurance.

Quick loans don’t often make sense

The focus of most finance companies that offer debt consolidation loans is the speed of the application process. They advertise “one-hour approvals” and “apply online”, and even the names focus on speed of adoption with Finance Now, Instant Finance and Easy Loans (NZ), all of which give the impression that you can settle your debts with a minimum of hassle.

Perhaps speed is not the most important thing to consider!

You may want to consider taking a little more time to make sure you get the best option that can save you a lot of money in a very short time.

Negotiate repayment of existing debts

Often, some savings can be made when paying off existing debts.

Any debts handed over to a collection agency such as Baycorp or Veda are often easy to negotiate a discount if full settlement is offered.

IRD debts often include excessive interest charges and penalties and often a discount can be given if you are able to offer full settlement.

Most personal loans and hire purchase agreements include payment protection insurance. You should be able to get a refund for the portion of coverage that has not been used due to early redemption.

Talk to your mortgage broker and they can arrange for you to access one of these discounts – they can save you a lot of money and could be a good reason to consolidate debt.

Mortgage brokers also do debt consolidation loans

Mortgage brokers speak to many people who have had situations where cash flow has been compromised and want to consolidate debt.

Mortgage brokers usually deal with homeowners or those who are about to buy their first home; however, most mortgage brokers know a lot about debt and are usually the best people to talk to if you want advice on the best options for a given situation.

Most mortgage brokers can show you the true cost of a debt consolidation loan and then it’s up to you to weigh your options. Mortgage Link is one of the best mortgage brokers out there and your mortgage advisor knows how to give you the best debt consolidation options and how to structure your debt so you can pay it off faster.

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Before trying out the “quick” options, consider whether you’d be better off spending a little more time meeting in person with a mortgage broker and making sure you get a suitable debt consolidation loan.