Dirty secrets of ‘debt consolidation’ loans

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

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