Debt con­sol­i­da­tion has pros and cons

The Tribune (NZ) - - NEWS | WHAT'S ON - ROB STOCK rob.stock@fair­fax­me­

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.

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