Personal loans the best bet for consolidating debt

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Personal loans the best bet for consolidating debt

CANSTAR releases personal loan star ratings report, researching 23 products from 12 providers to determine those which offer outstanding value for consumers.

Like many consumers and governments around the world, New Zealanders have had a love affair with debt for quite some time. The Reserve Bank of New Zealand (RBNZ) advises that in the twenty years to 2011, total housing and consumer loan debt increased around six-fold in dollar terms, or approximately two and a half times as a ratio of debt to household disposable income.

When it comes to unsecured personal debt, the main choice for consumers is between a credit card and a personal loan. With the average credit card interest rates still stubbornly high at around 18.69%, a debt consolidation loan - with an average variable interest rate of 15.89% - may be a better bet.

Current high, low and average personal loan rates

Source: CANSTAR. Based on personal loans on CANSTAR database, November 2013

“Credit card debt has become simply a way of consumer life for many and collectively we owe around $5.6 billion at any point in time,” says CANSTAR General Manager – New Zealand, Derek Bonnar. “For those who habitually revolve a debt though, they may be better off financially by utilizing a form of personal loan instead. That way they could eventually put their debt to bed. Even with some of the “low rate” credit cards we are seeing in the market at the moment, our calculations conclude that unless consumers are absolutely committed to paying of the card, they should probably elect to use a personal loan instead.”

Low interest – or no-interest – balance transfers are another temptation for debt holders, with offers as low as 0%. Mr Bonnar suggests that most debt holders would still be better off consolidating their debt with a personal loan. “A zero percent balance transfer sounds tempting, but consumers need to be realistic about their spending habits and their ability to repay their debts on time,” he says. “If credit card debt has built up due to continual overspending then it’s unlikely that someone can not only reverse that overspending, but can also pay their debt off within the low interest period. Instead, they may manage better with a structured personal loan.”

CANSTAR have looked at three different debt repayment scenarios where a sum of $10,000 was paid off over three years using a debt consolidation loan, an average interest rate credit card or a low rate credit card. The debt consolidation loan charged 15.89% interest whereas the credit cards charged a rate of 18.69%, with a 0% balance transfer for the first six months and 13.20% respectively.

The tables below compare the figures firstly for a scenario where the debt was carefully paid off over three years on both personal loan and credit card, followed by a scenario where the loan holder only made minimum repayments to the credit card.

“You may start out with the best of intentions but if you’re likely to relapse and use the credit card again,
repay late or not repay much as possible during the introductory period, forget the credit card idea,” Mr Bonnar said.

In its personal loan star ratings report, CANSTAR evaluated 23 products from 12 providers and awarded five stars to those offering outstanding value through a mix of the best rates and features. Please see the attached report for further details.

NZ_Personal_Loans_Ratings_2013.pdf

ENDS

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