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How to get out of debt

Take control of your finances and get rid of your debt faster with our comprehensive guide.

Whether it’s a home loan, credit card, car loan, personal loan or a combination of these, debt can place you under huge financial pressure. When it starts to become completely overwhelming, you will be left feeling like you’ll never be able to get out of debt.

Instead of letting these debts gnaw away at your money and your stress levels, you can use this guide to take control and get rid of your debt faster than you think. In this comprehensive guide, you’ll finds ways to manage specific types of debt, strategies for tackling multiple debts, and where to turn to for help.

Why is it important to take control of your debt?

It’s not uncommon to have debt. Many Kiwis owe money of some sort, whether it’s a few hundred dollars on their Afterpay account, a few thousand dollars on their credit card, or half a million on their mortgage. While debt can be managed if you have a budget in place and are sensible about your spending, it can consume your entire life if you let it get out of control. You may experience high levels of stress, depression, health issues, and debt can also put a strain on your family and relationships.

If you have multiple repayments to manage each month, it may become more difficult to afford basic living costs such as your rent, food and doctors appointments. Defaulting on repayments will negatively affect your credit score, and make it more difficult to obtain a loan or other form of credit in the future.

Another point to consider is that even if you only have one form of debt, for example, a car loan, the longer you take to pay it off, the more interest you will pay. This can add up to hundreds or thousands of dollars over the course of the loan term.

The first step to taking control of your debt is owning up to it. Be honest about the debts that you have and exactly what you owe. You can use the strategies below to manage your debt, and if you need help, talk to a trusted person you are close with or seek advice from a debt management expert.

managing and repaying your credit card debt will help you gain control of your finances

How to manage your credit card debt

With credit card rates among the highest of any interest-bearing products, it’s important to get on top of your balance (or balances) ASAP. Here’s what to do:

1. Make regular repayments

Around once a month you’ll get a new statement from your credit card. Check the due date and make sure you transfer at least the minimum amount listed before this date. Usually, you’ll have to pay at least 2–5% of your balance to meet this requirement, which is shown as a dollar figure.

Because interest is calculated based on your daily balance, you can actually reduce the amount of interest that’s charged each month by making more regular repayments. If you get paid weekly or fortnightly, you can just flick money across from your bank account every time your wages go in.

How much can you save by changing payment frequency?

Let’s say your credit card debt is $5,000 and your minimum repayment amount is 2%, or around $100 per month. If your card’s interest rate was 18%, here are the different interest charges you’d get depending on if you made monthly, fortnightly or weekly payments:

  • Monthly payments of $100: $45.86 in interest per month
  • Fortnightly payments of $50: $44.83 in interest per month
  • Weekly payments of $25: $44.64 in interest per month

When compared to monthly payments, you can save around 3.3% by making payments every fortnight and 3.6% by making weekly payments. The more you pay overall, the greater the savings.

2. Pay more than the minimum

It would take years to pay off your credit card if you only transferred the 2–3% minimum for each statement period. Say you had a card with a $5,000 debt and an 18% interest rate. If you paid a minimum of 2% each month, it would take 33 years to clear the balance and cost a total of $17,181 – more than three times as much as the original balance.

But if you paid $300 per month, your credit card debt would be cleared in 1 year and 7 months and cost a total of $5,698. That’s a saving of $11,483 and 31 years and 5 months.

3. Conduct a 0% balance transfer

If you want to get rid of your credit card debt as quickly as possible, you could consider moving the debt to a card that offers 0% or low interest during the introductory period. Known as balance transfer credit cards, these options give you a window of time to make repayments without accruing extra interest on your balance.

At the end of the balance transfer promotion, the 0% or low interest rate reverts to the standard rate with most banks. So ideally, you want to be able to clear your debt before that happens.


manage your car loan repayments

How to repay your car loan faster

Whether it’s your first set of wheels or a shiny new upgrade, a car loan is a popular way to finance the purchase. Since vehicles lose value as we use them, in a few years you could find yourself stuck making payments on a car that’s not worth the money you paid for it anymore. So here’s what you can do about it and get rid of your debt faster.

1. Make additional repayments

Depending on the type of car loan you have, you might be able to make additional or lump sum repayments to help pay it off faster. This option can be great if you get a windfall of money or a raise at work and have more cash to put towards your debt.

Say you got a car loan for $30,000 with an 8.76% interest rate. On a 5-year loan term, you’d be making regular monthly payments of $620 and pay a total of $7,145 in interest over the life of the loan. But if you were able to increase your monthly payment to $800, it would take 3 years and 8 months to pay off the loan and save you $1,964 in interest.

Find out what restrictions your car loan has

Lenders may place limits on additional and lump sum payments, especially for fixed-rate car loans. These loans often have early termination fees that could cost hundreds of dollars. Read our guide on paying off car loans early to find out which loans offer this option.

2. Check if you’re paying for extras

Some car loans provide loan insurance and other extras that could attract additional fees and charges. If these features are voluntary, you could be able to save money on your loan by opting-out of them.

If you’re in the market for a car loan now and looking to save costs, make sure you compare features and fees that will jack up the cost even when the interest rate seems low. To put this in perspective, paying just $20 per month in administrative fees would cost you $1,200 on a 5-year loan.

3. Consider refinancing your car loan

If your current car loan is costing you too much, it’s possible to switch to a loan from a different lender. This can help you save on interest and additional fees, offer more flexibility with repayments and provide additional features. Refinancing may also be a useful option if you want to upgrade your car but are still paying off the old one.

On the flipside, refinancing could lead to exit costs from your old loan, and setup costs for the new one. If you’re serious about getting out of debt, it’s worth comparing options to see if refinancing will help you save money and reach your goal faster.


repaying student loans and managing student debt

How to cut down your student debt

If you’re at uni or a private college, there are lots of financial factors that can lead to debt. From student loans to credit cards, personal loans and car loans for students, here’s what you need to know to manage student debt.

Student loan debts

Unless you opt to pay your course fees upfront, you’ll be taking out a student loan when you go to uni or another approved tertiary institution. While new students may be eligible for Fees Free tertiary education for the first year, by the end of your course, you could have a student loan worth tens of thousands of dollars.

Unlike other loans, student loans are interest-free if you live in New Zealand and only start accruing interest when you go overseas.

You have two different ways you can pay off this debt:

  1. Compulsory repayments. These are based on your taxable income and vary according to the IRD’s repayment threshold, which is adjusted every financial year. When you get a job, the tax form you fill out for your employer has a section asking if you have a student loan. As long as you tick “YES”, any compulsory repayments will be calculated and taken out before you get paid. Currently, 12% of your earnings over $19,760 will automatically be sent to the IRD. If you’re self-employed, you will receive details of your compulsory repayment requirements after submitting your tax returns.
  2. Voluntary repayments. You can pay off your student loan debt sooner by making additional, voluntary repayments at any time via internet banking, debit or credit card, money transfers from overseas or the IRD’s automatic payment authority form (IR586). Voluntary payments are not tax deductible, but could reduce your compulsory repayment amount if you make the payment before filing your tax return.

Student credit cards

Getting a credit card when you’re a student can help you pay for textbooks, housing and trips overseas. Many of these cards also waive fees for qualifying students. But when left unchecked, credit cards can have a serious impact on the debt you accumulate while studying. If you do decide to get a card, using the following tips will help you manage it responsibly:

  • Compare cards and choose one with low rates and fees
  • Always budget for your repayments
  • Aim to pay off the full amount by the due date on your statement
  • Only use it when you know you can afford to pay it off by the due date

Student car loans and personal loans

As well as student loans and credit cards, students can apply for personal loans and car loans that often have lower fees than those available to people who aren’t studying. While this can help you save when compared to regular products, it’s important to remember that these loans will still mean you’re taking on debt.

If you’ve never had a loan before, here are the key details to help you make it work for you:

  • Compare your options before you apply to find a loan that suits your circumstances and needs
  • Check for fees and budget accordingly
  • Always make repayments before the due date to avoid penalties and extra fees
  • See if you can make additional payments
  • Contact your loan provider with any questions – it’s their job to help you

learn how to repay your home loan debt

How to manage your mortgage

While the dream of owning a home or a slew of investment properties is very appealing, mortgage repayments can quickly bring us back down to earth. Still, your grand designs for property can become a reality and stay affordable with the following tips.

Pay the principal and interest rate

This type of repayment – sometimes referred to as “P&I” – covers the cost of both the principal amount you borrow and the interest charges. P&I repayments are more expensive than interest-only repayments, but help save you money in the long run.

As an example, say you wanted a $500,000 home loan on a 30-year term, with an interest rate of 5.50% p.a. If you chose interest-only payments, your monthly cost would be $2,291.67 and you’d pay a total of $825,000 in interest over the life of the loan.

In comparison, your principal and interest repayments would be $2,838.95 per month and you’d pay a total of $522,020.20 over the life of the loan. With this option, your total savings on interest charges would be $302,979.80 over the 30-year term, or around $10,099 per year.

Change your payment frequency

Like many other loans (and credit cards), interest on your mortgage is calculated daily and paid monthly. This means you could be able to save some money on interest charges by choosing to pay in fortnightly or weekly instalments. Just make sure you check with your provider, as some home loans place restrictions or vary terms based on your payment frequency.

Get an offset account

With this type of account, the amount of money you deposit into it is used to offset what you owe on your home loan. If you had a $500,000 home loan and put $10,000 in an offset account, you would only pay interest on $490,000 of the home loan amount.

Offset accounts are a great way to reduce what you pay on your mortgage while growing your savings. The longer you keep money in the offset account, the greater the potential savings on your mortgage.

Offset account hack

Want to take your offset account mortgage savings to the next level? Keep your salary in your offset account on a monthly basis and use your credit card to pay for things. When your credit card payment is due, transfer the money from your offset account and pay it off in full. This gives you a way to make interest-free purchases while maximising your mortgage savings.

Pay more than required

If your loan allows it, you could be able to save a small fortune by paying extra on the monthly amount. There are a few different ways you could do this:

  • Lump sums. If you get a windfall of money, you could put a chunk of it towards your home loan to shave off some of what you owe.
  • Higher repayments. If you can afford to pay more than what’s required for the month, setting yourself a goal that’s achievable on an ongoing basis will help reduce the cost in the long run.

With this strategy, even a small amount can have a big difference over the long term. Just remember to check the terms and conditions of your loan to make sure extra payments won’t attract additional fees or variations.


personal-loan-debt

Getting rid of personal loan debt faster

Personal loans are used for everything from financing a holiday to paying for big-ticket items or consolidating debt, so there’s a good chance you’ll get one at some stage in your adult life. Depending on the type of loan you get, you could consider some of the following strategies to keep your debt in hand.

  • Make additional payments. Making extra repayments allows you to save money on interest and get rid of your debt faster.
  • Vary the loan term. Personal loans usually offer payment plans that range from six months to five or more years. You’ll pay less each month with a longer term, but more over the life of the loan as interest adds up. Opt for the shortest loan term you can afford to help keep costs down. And if your circumstances change, you can always contact your issuer to request a longer or shorter loan term.
  • Set up automatic payments. Personal loan repayments are usually the same each month, which makes them easy to budget for. Many lenders will set up a direct debit, but if yours doesn’t, setting up automatic payments to your personal loan means that you won’t forget to make a manual payment. If your loan terms allow, adding an extra $5-10 per payment will help you get out of debt faster.

Debt reduction strategies for multiple debts

One of the main problems people run into is having too many separate debts to manage. If you take out a car loan, have multiple credit cards or a mortgage, then managing your repayments can get complicated.

The first thing to do is to sit down and work out all of the different lenders you owe money to, how much money you still owe, what you are paying in interest and how much your repayments are. Then you can get a realistic idea of how much you’re putting towards your debts each month.

When you break all of these debts down, you can identify the lenders to which you are paying the highest interest rates and fees. For example, you may have a couple of credit cards with higher interest rates than the others, or you may be paying more in unsecured personal loan fees and interest than you are for a car loan.

By understanding your debts you can decide on an appropriate strategy to manage them. No matter how many separate debts you have to how many lenders, there are several debt reduction strategies which can help you take control of your repayments and better manage your debt.

Strategy #1: Snowball method

If you’ve done any research at all about getting out of debt, you’ve probably heard of the snowball method. This debt reduction strategy gets its name from its ‘start small and get bigger’ approach to paying off your debts. The basic premise is simple: start by paying off the smallest debt first, then work up to the larger ones.

To get started, make a list of all your debts from the smallest amount to the largest. Don’t worry about the interest rate attached to those debts unless two amounts are the same – when this occurs, pay off the debt with the highest interest rate first.

Once you’ve finalised your list, it’s then a matter of making the minimum repayment on all debts except the smallest amount. For this debt, repay as much as you can afford each month until it is completely repaid, and you can then move on to the next amount on your list.

Why should you consider the snowball method?

The strength of the snowball method lies in its ability to let you start repaying your debts one small step at a time. As your debts are paid off one by one, your confidence in your financial management skills will grow and you will be able to gather the momentum you need to climb your personal mountain.

When might the snowball method not work?

The downside of this method is that it won’t always be the most cost-effective way to get out of debt. In many cases, tackling the largest debt or the amount accruing the highest rate of interest is the best place to start.

Strategy #2: Avalanche method

The snow theme continues with the avalanche method, which is also known as debt stacking. Rather than listing debts in order from the smallest to the largest amount, this method involves listing your debts from the highest interest rate to the lowest interest rate. Don’t worry about the dollar amount unless the interest rates on two separate debts are the same, in which case you pay off the higher amount first.

From this point on the process is quite similar to the snowball method. Pay the minimum payment on all debts except the one with the highest interest rate, which you should contribute as much towards as you can afford each month. Once this debt is repaid, move on to the next amount on your list.

Why should you consider the avalanche method?

The avalanche method is usually seen as a logical choice when selecting a debt reduction strategy. This is simply because it’s a more cost-effective way to pay down your debts, allowing you to spend as little as possible to get back on track.

When might the avalanche method not work?

The downside of the avalanche method is that it can initially take a while to pay off debts. While the snowball method provides quick gratification and the psychological boost of paying off small debts first, the avalanche approach doesn’t offer the same instant rewards. As a result, some people can become discouraged and lose their disciplined approach to debt repayment.

Strategy #3: Debt tsunami method

Many finance experts advise leaving your emotions out of it when reducing your debt – after all, letting our hearts rule our heads is one of the ways many of us ended up in debt in the first place. But the debt tsunami method, named by Adam Baker from Man vs Debt, advocates a different approach.

The idea behind the debt tsunami approach is to pay off your debts in order of their emotional impact. Instead of worrying about the amount you owe or the interest rate that applies, prioritise the debts that have the greatest psychological weight.

For example, while a $5,000 credit card debt at 15% p.a. may be costing you the most, you may first want to pay back the $1,000 your best friend loaned you interest-free when you were experiencing financial hardship.

Why should you consider the debt tsunami method?

While it’s impossible to deny the logic of finding the most cost-effective way to reduce debt, it’s also hard to go past the emotional influence debt can have over our lives. The strength of this approach lies in its ability to allow you to reduce the psychological impact of debt, and to find the necessary motivation to seize control of your finances.

When might the debt tsunami method not work?

The unavoidable truth is that there are cheaper ways to get out of debt than the debt tsunami approach. If paying off your debt in the most cost-effective way possible is important to you, consider other options.

Strategy #4: Balance transfer credit cards

Have you accumulated debt across multiple credit cards? Are you struggling to manage the repayments and high interest rates for each separate credit card debt?

If so, you might be able to bring your credit card debt under control by consolidating multiple credit card accounts onto a single credit card with a balance transfer. There are myriad of balance transfer credit cards available that let you move your debt over to a new card and take advantage of no or low interest charges for an introductory period – for example, 0% p.a. on balance transfers for the first 6 months.

Some credit card providers will also let you balance transfer personal loan debt, providing another flexible option to help you bring your finances under control.

Why should you consider a balance transfer credit card?

It’s common knowledge that credit card interest rates can be painfully high, so taking advantage of having low or no interest for a period of time can be an excellent way to get out of debt faster. Only having to make one monthly repayment rather than several separate repayments for each individual debt can also make it much easier to manage your money.

When might a balance transfer credit card not work?

If you’re thinking of applying for a balance transfer credit card, remember that you’ll typically need a good credit history in order to be approved. You should also be aware that some card providers charge a balance transfer fee, and check the fine print to find out what interest rate will apply when the introductory period ends.

Strategy #5: Debt consolidation personal loans

Juggling multiple repayments can be costly and confusing, so you may want to consider consolidating all those debts into a single personal loan. Debt consolidation personal loans cut down the total amount you pay in interest charges and help you save money on fees.

Name Product Interest Rate (p.a.) Min. Loan Amount Max. Loan Amount Loan Term Monthly Service Fee Establishment Fee
The Lending People Debt Consolidation Loan
6.95% - 26.95%
$2,000
$150,000
1 to 7 years
$0 - $10 depending on lender
$50 - $695 depending on lender
Eligibility: Be 18+, an NZ citizen or permanent resident, in employment and earning at least $500 per week.
Debt consolidation loans of up to $150,000 from a variety of reputable lenders.
Harmoney Debt Consolidation Loan
6.99% - 24.69%
$2,000
$70,000
3 or 5 years
$0
$200-$350 depending on loan size
Eligibility: Be a NZ resident/citizen, hold a valid NZ drivers license/passport, have a good credit score.
Consolidate your debt with an unsecured loan from $2,000 to $70,000.
The Co-operative Bank Personal Loan
6.99% - 19.99%
$3,000
$50,000
6 months to 5 years
$0
$200
Eligibility: Be 18+, an NZ citizen/permanent resident, or have a valid work visa.
Limited time offer: Floating-rate personal loans over $10,000 capped at 9.95% p.a. if you apply before 24 May 2021. Ts&Cs apply.
Kiwibank Unsecured Personal Loan
13.95%
$10,000
$70,000
6 months to 7 years
$0
$240, $0 for Graduate Pack customers
Eligibility: Be 18+, an NZ citizen/permanent resident, and have a stable income. Ts&Cs apply.
Unsecured personal loans from $10,000.
Nectar Unsecured Personal Loan
8.95% - 29.95%
$1,000
$25,000
6 months to 4 years
$0
$240
Eligibility: Must be 18+, an NZ citizen or permanent resident, have an income of $400 per week or more (after tax) and a stable credit history.
Unsecured loans from $1,000 with payouts made within one day of approval. Applications entirely online.
Gem Unsecured Personal Loan
8.99% - 22.99%
$2,000
$70,000
6 months to 7 years
$0
$240
Eligibility: Be 18+, a permanent NZ resident and earning a stable income.
Unsecured personal loans with weekly, fortnightly or monthly repayment schedules and no fees for early repayment.
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Why should you consider a debt consolidation personal loan?

Debt consolidation personal loans can help reduce your interest payments and loan fees – you only have to pay interest and monthly fees on one loan, not across several debts. They can also make it easier for you to manage your finances, as you only have to worry about making regular repayments on one loan.

When might a debt consolidation personal loan not work?

Many lenders will only accept borrowers with a good credit history, so finding funding from a reputable lender can be difficult for borrowers with bad credit. You’ll also need to read the fine print and make sure you’re fully aware of the interest rate, fees and charges that apply to a debt consolidation loan so you can be sure it will actually save you money.

Strategy #6: Debt agreements

A debt agreement is a binding agreement between you and your creditors. When you enter into one of these agreements, you commit to paying a sum of money that you can afford in order to settle your debts.

A debt agreement is an act of bankruptcy which, while different from declaring yourself bankrupt, can have serious financial consequences. With this in mind, you’ll need to carefully consider your options before deciding whether it’s the right choice for you.

Why should you consider a debt agreement?

If you’re under significant financial pressure and struggling to repay your debts, a debt agreement can help you avoid bankruptcy, get your creditors off your back and stop you sinking even further into the red.

When might a debt agreement not work?

You should consider all other debt reduction options before entering into a debt agreement. Not only will the debt agreement appear in your credit file for five years but your name will also be entered on the New Zealand Insolvency Register for a limited period of time. This can have a huge impact on your ability to access credit.

And if you fail to keep up with the repayment schedule outlined in the agreement, you can lose your secured assets and your creditors could apply to the court to have you declared bankrupt.

Which debt reduction strategy is right for you to get out of debt?

This depends on a range of factors. Everyone’s financial circumstances are different, no two debts are the same, and the psychological approach you have towards debt can have a big impact on your choice of strategy.

The most important thing you can do is create a plan and stick to it. Work out which strategy you want to use and decide on a realistic and affordable way to start taking control and get rid of your debt.

Who can help me get out of debt?

While it’s up to you to make the first step in getting out of debt, there are services available to Kiwis who need a helping hand in taking control of their finances.

Free help for managing debt

Good advice for dealing with debt doesn’t have to be expensive – it’s free when you ask the right people. Here are a few organisations that offer free assistance for Kiwis who want to get out of debt and need help with their budget:

Paid debt management services

While you can get good advice for free, some organisations offer debt management services for a price:

        • KiwiDebt. KiwiDebt offers assistance with debt management plans, formal creditor’s proposals, debt arrangements and settlements.
        • Debtfix. Debtfix can help you with hardship applications, debt repayment orders, debt consolidation loans, debt management plans, budgeting, no asset procedures and bankruptcy applications.
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