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 debt that you may have.
These finance companies will often “sell” their loans on the basis that your weekly repayments are less, but don’t always tell you that they will extended the loan term, they do not tell you about the higher interest rates or the additional fees that you will be charged.
People want to consolidate their debts to help their financial situation and allow them to manage their money better; however you also should ensure that you are not just extending the loan term with higher interest rates and more fees just to reduce the weekly repayments.
The Right Reasons To Consolidate Debt
It is easy to get weighed down with debt and being mortgage brokers we do see a lot of people that are 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 has happened and it is no point dwelling too much on the past anyway. We need to deal with the debt that you have now and consider if a debt consolidation loan is the right option.
The first thing that a mortgage broker should do is get a statement of position from you so they can establish exactly what debts you have. Only then they should assess which debts should be consolidated.
This decision to refinance debt is typically based on the interest cost you are paying for each debt, the penalties (if any) for early repayment, the term remaining and the actual repayment amount.
You should refinance IRD debt where possible as the interest and penalties can be extremely tough, but why would you refinance an interest free loan?
There are times when you may refinance an interest free loan; however you would need to consider this carefully in the overall debt restructure to ensure that it is the best thing to do – normally it wouldn’t be.
What If I Have Bad Credit?
As mortgage brokers we get approached a lot by people who have too much debt and want to get a debt consolidation loan, but have bad credit and therefore think that they cannot get a loan.
There are degrees of bad credit;
A few small defaults on your Veda report – we look at what these are and the reason that they happened and generally if we can explain these then the lenders will be okay with them.
Larger defaults and judgements on your Veda report – we will need a better explanation and we may be limited with the choice of lenders; however there are a range of lenders including non-bank mortgage lenders that have options.
Loan or mortgage arrears – any new lender will want an explanation regarding why the loans or mortgage is in arrears, and this could be the very reason that we want to arrange a debt consolidation loan.
Without looking at your personal situation there is no way of knowing if you can consolidate your debts when you have bad credit, but it is certainly worth looking at. A debt consolidation loan might be the best way to tidy up your credit and manage your way back to “good” credit.
Beware Of The Costs Of Debt Consolidation Loans
The costs of debt consolidation loans vary from company to company and depending 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 therefore reduce the cost of the loan. Also generally you will pay more if you have bad credit and other situations where you fit outside the “ideal profile” set by the lenders.
Debt Consolidation Loan Comparison
It is extremely hard to source the information to do a proper debt consolidation loan comparison as many of the options to you are based on a risk assessment which sets the interest rate that you would be charged.
The costs involved in a debt consolidation loan are normally;
The interest rate – while often it is hard to find out what the interest rate is with debt consolidation loans you should always ask and compare this to what you are currently paying and also with any other options. Sourced from their websites GE Money quote an example of a 5-year loan with an interest rate of 19% and Finance Now quote rates starting from 13.95% – starting from!
Easy Loans (NZ) say they will quote on a case by case basis, Geneva Finance, QuickCash Finance, Instant Finance and Max Loans do not have any mention of rates that we could find.
The fees – a lot of finance companies will charge an establishment fee and some also charge on-going monthly fees and termination and/or early repayment fees.
Insurances – most finance companies will “sell” a payment protection insurance policy with every loan. This is generally a very expensive way to buy insurance and we suggest that you should speak to an insurance adviser rather than take these options.
Our experience shows many of the debt consolidation loans will have interest rates between 20-30% with an establishment fee and they would have also included an expensive payment protection insurance that would not be needed if you already have your own Income Protection Insurance.
Fast Loans Do Not Often Make Sense
The focus of most finance companies that offer debt consolidation loans is the speed of the application process. They advertise “1-hour approvals” and “online applications” and even the names focus on the speed of acceptance with Finance Now, Instant Finance and Easy Loans (NZ) all giving the impression that you can get your debts sorted out with the minimum of fuss.
Maybe speed is not the most important thing to consider!
You might want to consider taking a little more time to ensure that you get the best option which could save you a lot of money over a very short period of time.
Negotiate Repayment Of Existing Debt
Often there can be some savings that you can make when repaying existing debt.
Any debts that have been handed to a collection agency like 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 included a payment protection insurance cover. You should be able to get a refund on the portion of cover that has not been used due to early repayment.
Talk to your mortgage broker and they can help to ensure that you can access any of these discounts – they can save you a lot of money and may provide a good reason to consolidate debt.
Mortgage Brokers Do Debt Consolidation Loans Too
Mortgage brokers speak to a lot of people who have had situations where cashflow issues and want to consolidate debt.
Most of the time mortgage brokers deal with home owners, or those who are about to buy their first homes; however most mortgage brokers know a lot about debt and are typically the best people to talk to when you want advice on the best options for any given situation.
Most mortgage brokers will be able to show you the true costs of a debt consolidation loan and then it is up to you to weigh up your options. Mortgage Link is one of the best mortgage brokers around and your mortgage adviser knows how to get you the best options for deb t consolidation and show you how to structure your debt to help you pay it off faster.
Before you try the “fast” options, consider if you would be better to take a little more time to meet with a mortgage broker in person and ensure that you get a suitable debt consolidation loan.
You have a choice – you can use a mortgage broker or go to the bank yourself.
A mortgage broker should be able to give you better choice of lenders, better advice on how to structure your mortgage and knows how to make sure you get the best deal.
In most instances you can find a mortgage broker that gets paid by the bank and therefore are a free service to you, so ask yourself why you wouldn’t use a mortgage broker?
My name is Stuart Wills and I operate Mortgage Link Auckland
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