Debt consolidation has pros and cons
There’s an intensive debt consolidation television advertising campaign under way.
It’s been sparked by the sale of GE Money to an Australian lender, resulting in a name change for the New Zealand business to Gem Finance.
Gem specialises in debt consolidation loans, which are loans taken out to repay a whole bunch of loans the borrower already has, rolling them into a single loan that is easier to manage.
Naturally, it wants to tell the world about its product, and its new name.
My belief is that all of us have certain advertising hates. I especially dislike the ‘‘My BP story’’ kind of advert, you know the kind that tell trite little stories designed to warm the heart towards the advertiser.
I don’t know about you, but my ‘‘story’’ with service stations is a straightforward one of me trying to give them as little of my money as possible.
When my household went down to one car two years ago, my petrol station story became a happier one from my perspective.
But even more than petrol station story ads, I dislike TV loan adverts.
The cherie bonhomie, lender-as-your-friend style of TV debt advert masks the truth about consumer debt: It impoverishes borrowers to enrich lenders, exposes borrowers to risk, and inflates the cost of things.
If I could wish a debt consolidation ‘‘story’’ on any fellow human it would be this: She/he never needed a debt consolidation loan.
By definition, people who take out debt consolidation loans have problem levels of debt.
The dual aims of debt consolidation should be to clear the debt quickly, and to reduce the fees and interest the borrower pays to a minimum.
There are plenty of debt consolidation loans available, and plenty of lenders, including banks, finance companies and peer to peer lender Harmoney.
The Commission for Financial Capability’s Sorted website lists the pros and cons of debt consolidation loans.
It says people usually debt consolidate at a lower interest rate, but spread repayments over a longer period of time so the weekly or monthly payments are smaller.
The negative of spreading payments over a longer time is that the borrower pays more interest, and is at risk of defaulting for longer.
Taking on a debt consolidation loan also results in a new one-off establishment fee. If that is added to the loan, the interest bill rises even more.
Lenders specialising in debt consolidation loans often charge a higher rate than the bank, and borrowers should pay attention to whether there are early repayment charges.
These are the things you should consider if you find yourself with a debt consolidation ‘‘story’’ developing.
But make sure the story has no sequel.
It should end with the words, ‘‘and she/he lived happily debt-free ever after’’.
Consumer debt impoverishes borrowers to enrich lenders, exposes borrowers to risk, and inflates the cost of things.
Happily ever after starts when the debt consolidation loan is repaid.