If you are considering a debt consolidation loan, you need the advice of a financial mentor.
Rob Stock is a Stuff business journalist specializing in money and consumer issues.
ANALYSIS: The dirty secrets of debt consolidation loans have been revealed in documents sent to the government.
They can be interpreted as sending a clear message to borrowers who are considering taking out one: you are experiencing a financial emergency and need expert help.
A debt consolidation loan is a loan that people take out to pay off their other debts. The theory goes that one loan is easier to manage than multiple loans.
But if you are in debt, it may be time to question your own judgment and financial skills, and get free, independent advice from a budgeting service.
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The dirty secrets of debt consolidation loans have been exposed in submissions sent to the government by financial mentors from budgeting departments across the country opposed to plans to make it easier for lenders to sell.
Some mentors said they had never seen a debt consolidation loan that made things better for a borrower.
They said a typical trick of lenders was to refinance short-term debts into a single, longer-term debt consolidation loan, on which they could earn interest over a longer period.
Financial research website Moneyhub has compiled 12 credit card “sacred rules” that every cardholder should follow, if they don’t want to fall victim to easy and costly consumer debt.
Borrowers were charged new loan fees, and sometimes lenders sold them low-value loan repayment insurance, or waivers, which are like insurance, except they’re not covered by law. which are supposed to keep insurers honest and financially viable.
Mentors said unsecured loans were sometimes refinanced into debt consolidation loans secured by property, and not always the property of the borrower.
“We also see many debt consolidation loans secured by the assets of other family members. This has a huge negative impact on family dynamics and everyone’s mental well-being. We call it STD – sexually transmitted debt,” said Andrew Henderson and Charlotte Whitaker of the Dunedin Budget Advisory Service.
Collateral could be “clawed back” by lenders if borrowers do not repay.
Some mentors reported seeing interest-free debts such as buy now, pay later (BNPL) loans, family loans, some debt collection debts, education debts, health debts, electricity debts and even interest-free debts owed to the government refinanced into debt consolidation loans at higher interest rates.
Some mentors even claimed that “irresponsible” loans, granted to borrowers who could not reasonably be expected to repay them without suffering hardship, were converted into new loans through debt consolidation.
Under responsible lending laws, these irresponsible loans should be unwound, not sneakily converted into new loans.
The mentors also said that sometimes the loans repaid by debt consolidation loans were on revolving loan facilities like BNPL accounts, credit cards or store cards.
These accounts were not always closed, and vulnerable and desperate households ended up having access to even more debt.
Henderson and Whitaker said, “In our view, a debt consolidation loan is not a loan, but a product used to achieve client betterment.”
Where it worked, it worked with low-interest, interest-free debt consolidation loans from nonprofit lenders like Ngā Tangata Finance and Good Shepherd, they said.
Lenders saw it as just another way to keep Whānau in debt, for a longer period, with collateral and no other options, they said.
The unequivocal conclusion is that debt consolidation should be approached with extreme caution.
- Debt consolidation loans are a symptom of financial distress
- Beware of the Dirty Tricks of Debt Consolidation
- Get independent advice