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How Do Debt Consolidation Loans Work?

Keeping track of your debt can sometimes be a challenging task. Rather than having to pay back different amounts to different lenders, on different days, with different interest rates, opting for a debt consolidation loan means you’ll only have one debt to manage.

Here are the basics you need to know about debt consolidation loans and why many borrowers find them to be a good option.

What is a debt consolidation loan?

To consolidate simply means to combine several things into one. When we talk about debt consolidation, it refers to the process of combining multiple debts.

Therefore, getting a debt consolidation loan allows you to pay back your existing debts all at once, leaving you with one easy to manage loan. This process is designed to minimise stress, allowing you to pay off your loans sooner.

At QuickCash our NZ debt consolidation service combines all of your bills into one single loan, which means that rather than having to keep track of various debts, you only need to manage one single repayment.


A 30-year-old woman named Lisa is a department manager working in Rotorua. Over the years she’s accumulated various debts that she’s currently paying back, totalling $16,000. These debts include:

  • A credit card, maxed out at $6,000, charged at an annual interest rate of 15%.
  • A boat loan of $7,000, charged at an annual interest rate of 19%.
  • A $3,000 personal loan that she took out for her wedding charged at an annual interest rate of 14%.

Each of Lisa’s debts has a different interest rate and different payment date, making it difficult for her to manage her finances. By consolidating her debts, Lisa can put these three debts into one individual loan with a lower fixed interest rate. This makes her finances easier to manage as she knows exactly how much each of her payments are, and can budget accordingly.

What debts can I consolidate?

Like the example above, debt consolidation loans are usually used to pay back unsecured personal debt such as personal loans and credit cards. Other debt, including student loans or mortgages, typically can’t be included.

When is a debt consolidation loan a good idea?

If you have various debt that will likely take more than 3-12 months to repay, getting a debt consolidation loan can be a useful way to take control of your finances. This type of loan is most suited to those who don’t plan on taking on more debt and already have a reasonable credit score.

Another essential factor to consider when deciding whether or not to consolidate your debt is the interest rate. Often debt consolidation loans will have a lower interest rate than what you’re currently paying on individual debts. If this is the case, choosing to consolidate your loans will likely save you money on interest.

We generally find that our debt consolidation services at QuickCash, are most beneficial to those who have numerous debts with high-interest rates or frequently receive calls from debt collection agencies.

How does a debt consolidation loan work?

As usual, you’ll have to apply for a debt consolidation loan. Before doing so, you’ll want to figure out how much money you owe when all your current debts are combined. Although it can be overwhelming to see the number added up, it’s an essential step to getting your finances back on track. Once you know the amount, you can then apply for a debt consolidation loan with an accurate figure in mind.

If your debt consolidation loan application is approved, you’ll receive the money in your bank account. Typically, you’ll then need to pay your existing smaller debts manually.

After consolidating your debt, you may feel like your loans have disappeared. Nonetheless, it’s important to remember that you still have the same amount of debt as before, but rather than paying multiple lenders at a high-interest rate, you now only have to make a single payment at a lower fixed rate.

woman getting approve for debt consolidation loan

Why are debt consolidation loans useful?

As debt consolidation loans will likely have a fixed interest rate, this allows you to budget with more certainty, knowing the payment won’t increase. Having this fixed-rate also allows you to know exactly when you’ll be debt-free. This will not only help you to plan but will enable you to feel relieved knowing your finances are under control. If you are able to pay back your loan sooner, some lenders such as QuickCash don’t have any early repayment fees.

In addition to debt consolidation loans usually have a fixed interest rate, they’re typically a lot lower than what you may currently be paying on individual debts. Therefore, by choosing to get a debt consolidation loan, you’ll not only be able to pay off your debt faster but also save money by paying less interest overall.

Many Kiwis find debt consolidation loans useful due to the convenience they offer. Only having to worry about one loan means you’ll get to save precious time and effort. Rather than managing various debts with different conditions, rates, and payment dates, debt consolidation loans ultimately make the pay-back process a lot easier.

The simplicity of a single debt also means that payments are a lot harder to miss. Not missing payments may help you maintain your credit score and avoid paying late fees.

Will a debt consolidation loan lower my credit score?

Your credit score will only be affected by a debt consolidation loan if you don’t pay it back on time. If you pay off all your existing debts and make frequent, on-time repayments on your debt consolidation loan, your credit score will not be adversely affected. In fact, by having your other debts marked as paid on your credit report, it will show that you’re on track to getting your finances sorted.

While the idea of taking out another loan to pay back your existing debts may sound bonkers at first, we hope this article has helped you realise that sometimes it’s a good option, and can even save you money in the long run. It’s important to remember that consolidating your debts doesn’t make them disappear, but it does make them a whole lot easier to manage.

If you have any questions about this article, or about personal loans in general, feel free to call us on 0800 784 252.

Disclaimer: This article is intended to provide general information only. It does not take into account your financial needs or personal circumstances. It is not intended to be viewed as investment or financial advice. Should you require financial advice you should always speak to an Authorised Financial Adviser.