Lately, New Zealand’s consumer debt, including mortgages, car finance, credit cards, and personal loans, has increased significantly, all because of the global pandemic and uncertainty. Some people lost their jobs, whereas others had to fight this deadly virus, impacting financial stability. As it became hard to make ends meet, people increased credit spending and started taking loans.
Now, it is becoming arduous for New Zealanders to manage this debt. It has grown into a mountain where chipping in a few pennies every month makes no difference. Thus, they are looking for options to reduce this debt settlement. Most of them have started working with their creditors to settle the debt using an equity line of credit. It means they have put their home as collateral to secure additional money.
More than doing well, it will push them further into the debt trap. So, how to pay off loans without borrowing additional money? Getting a debt consolidation loan could be handy, as all credits to New Zealand’s government initiatives. It involves combining different loans into one at a consistent interest rate. Hence, you can streamline all your loan repayments into one monthly payment at a much lower interest rate.
If you don’t know much about this, keep reading to understand how a debt consolidation loan works.
How does Debt Consolidation work?
People drowning under different high-interest-bearing loans often consider taking a debt consolidation loan. It combines all debts into a single larger loan, allowing borrowers to pay a single monthly payment instead of a separate price for every debt.
However, you can look for a reliable lender when consolidating debt. Many companies offer fast approval debt consolidation loans in NZ at low-interest rates, approving your applications the same day. All in all, debt consolidation loan simplifies financial management and offers borrowers more favorable loan terms.
Here are a few reasons why a debt consolidation loan is a right choice.
- Improves Credit Score
Business owners and individuals often struggle when it comes to their credit scores. After all, their credit history and records have pushed them into a debt trap due to high interest-bearing loans. Fortunately, debt consolidation can be an ideal way to redeem themselves. It gives your credit score a boost, building your credibility. That is because consolidation reduces your credit utilization rate. Let us explain how.
Your credit utilization rate comes from how much you owe divided by your credit limit. If you have $8000 available on two different cards with a balance of $4000 on one of them, your utilization rate is 50%. It is because you are only using 50% of the available credit. Remember, your credit score wouldn’t increase overnight. You will experience a slight decline when you acquire a debt consolidation loan. However, you will witness long-term gains in your credit score and savings on the interest rate.
- Offers Low-Interest Rates
Mostly unsecured debt, such as from credit cards, has high-interest rates. It significantly adds to the debt that you must pay every month. By rolling your multiple high-interest debt accounts into one, you will pay much less than in the longer term. Likewise, it will enable you to secure a lower interest rate on your new loan, especially if you have a good credit score.
The average interest rate for those with excellent credit is 4%-20% compared to those with low credit scores paying 15%-36%. Nonetheless, whichever bracket you find yourself in, the interest rate will still be much lower than what you pay currently.
- Turns Multiple Payments into a Single Payment
Managing finances is already challenging, and adding multiple loan repayments further adds to the burden. Debt consolidation makes it easier and straightforward to pay your debt. Sometimes, it even leads to lower monthly payments as the payoff period is extensive. Thus, if you are someone who has multiple credit cards, consolidating them will give you peace of mind. It will eliminate the fear of missing credit card billing dates, as payments will all be made simultaneously.
Indeed, these single payments don’t mean your debt gets waived off, but with multiple payment deadlines gone, you can focus on one debt source.
- Expedites Pay Off
Truthfully, lenders don’t care if you repay after one year or five. After all, they earn interest on your dues, and the more you prolong, the more interest they can earn. Another advantage of debt consolidation is that it considers different factors before consolidating the loan. From income and credit score to a payback plan – they manage everything accordingly. Hence, the payback is shorter, expediting the payoff process.
Further, debt consolidation has less accruing interest than separate loans. As a result, you can make additional repayments with the money you save each month, allowing you to pay debt earlier. In addition, you can save much more money on interest in the longer run.
Final Thoughts
As market interest rates continue to increase in today’s uncertain economy, debt consolidation loans seem a viable choice. However, you must evaluate your financial situation carefully to ensure it fits your needs. Analyze the significant gains that debt consolidation offers and bring your debt sources together. It will boost your credit score, while the single monthly payments will improve your financial situation.