Marlborough Express - The Saturday Express, Marlborough

Dirty secrets of ‘debt consolidat­ion’ loans

- Rob Stock

ANALYSIS: The dirty secrets of debt consolidat­ion loans have been revealed in documents sent to the Government.

They can be read as sending a clear message to borrowers considerin­g taking one out: You are experienci­ng a money emergency, and need expert help.

A debt consolidat­ion loan is a loan people take out to pay off their other debts. The theory goes that a single loan is easier to manage than multiple loans.

But if you are in a debt mess, it may be time to question your own judgment and financial competence, and get some free, independen­t advice from a budgeting service.

The dirty secrets of debt consolidat­ion loans were revealed in submission­s sent to the Government by financial mentors from budgeting services around the country opposed to plans to make it easier for lenders to sell them.

Some mentors said they had never seen a debt consolidat­ion loan that improved things for a borrower.

They said a typical trick of lenders was to refinance shortterm debts into a single, longerterm debt consolidat­ion loan, on which they could earn interest over a longer period of time.

There were new borrowing costs charged to borrowers, and sometimes lenders sold them poor-value loan repayment insurance, or waivers, which are like insurance, only they are not covered by the laws that are supposed to keep insurers honest, and financiall­y viable.

Mentors said unsecured loans were sometimes refinanced into debt consolidat­ion loans secured against property, and not always the property of the borrower.

‘‘We also see many debt consolidat­ion loans secured against other family members’ property. This has an enormous negative impact on the family dynamics and mental wellbeing for all.

‘‘We call this STD – sexually transmitte­d debt,’’ Andrew Henderson and Charlotte Whitaker from the Dunedin Budget Advisory Service said.

Security could be ‘‘repossesse­d’’ by lenders, if borrowers fail to make repayments.

Some mentors said they had seen interest-free debts like buy now, pay later (BNPL) loans, loans from family, some debt collector debt, education debt, health debt, power debt, and even interest-free debt owed to the government refinanced into higher-interest debt consolidat­ion loans.

Some mentors even claimed ‘‘irresponsi­ble’’ loans, made to borrowers who could not reasonably be expected to repay them without suffering hardship, were being converted into new loans through debt consolidat­ion.

Under responsibl­e lending laws, these irresponsi­ble loans should be unwound, not slyly converted into new loans.

Mentors also said that sometimes the loans paid off by the debt consolidat­ion loans were on revolving loan facilities like BNPL accounts, credit cards, or store cards.

These accounts were not always closed down, and so vulnerable and desperate households ended up having access to even more debt.

Henderson and Whitaker said: ‘‘In our opinion, a debt consolidat­ion loan is not a loan, but a product used to achieve for the betterment of the client.’’

Where it worked, it worked with low and no-interest debt consolidat­ion loans from notfor-profit lenders like Nga¯ Tangata Finance, and Good Shepherd, they said.

Lenders saw it as just another way of keeping wha¯ nau in debt, for a longer timeframe, with security interests and no other options, they said.

The unmistakab­le conclusion is debt consolidat­ion should be approached with extreme caution.

Money Matters


Got a question for Rob Stock or an issue you want him to tackle? Contact him by going online to Neighbourl­y and typing the name of our newspaper into the search bar. Click our name and select Contact from the menu bar and ‘‘message our reporter’’ from the drop-down menu.

 ?? ?? If you are considerin­g a debt consolidat­ion loan, you need the advice of a financial mentor.
If you are considerin­g a debt consolidat­ion loan, you need the advice of a financial mentor.
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