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Managing debt

Debt comes in many forms – credit cards, hire purchase, car loans, personal loans, mortgages, student loans. There's no shortage of people out there wanting to lend you money! Borrowing money can seem like a quick fix but having debt can limit your options in life.

Get sorted with these top debt tips

Find out the best ways to manage these different types of debt:

Think before you borrow

Just because you can afford the repayments doesn't mean a loan is your best option. Getting into debt is quick and easy. Getting out is much harder and may take years.

Tip: Don't take advice from the person lending you money. They want you to borrow because they make money from the interest you’ll pay.

Follow these simple rules about borrowing and saving:

  • Ask yourself, Do I really need it? and Can I afford it?
  • Borrow to buy an asset
  • Save to pay for expenses.

Can you afford it?

Deciding whether you can afford to borrow money to buy something involves more than just working out if you can meet the loan repayments.

For example, you may be able to afford to borrow money to buy a car, but what about the costs to register, run and maintain it? Work out the full effect of the purchase on your budget before deciding if it's worth borrowing for.

There may be other ways to get what you want without borrowing money. For example, you could save or put things on lay-by and pay them off in instalments.

Borrow to buy an asset

There are two kinds of assets - value builders and value losers.

Value builders are assets that are likely to hold their value, grow in value or give you income after you've paid for them. So they can be OK to go into debt for. A house is the classic value builder (although houses can lose value).

As a rule, if you keep a house for the long term (over ten years) the value will increase or stay about the same. And if you needed to, you could sell the house and pay back your debt.

Education can also be a value builder. It can improve your job prospects and your income earning potential.

Value losers are assets that lose value after you've paid for them, like a car. Every year your car is worth less. Borrowing to buy a car can be a bad move, especially if it loses value faster than you can pay off the debt.

If you really need to buy a car or any other value loser with a loan, think about borrowing only part of the purchase price.

Save to pay expenses

Expenses are things that leave you with nothing after you've paid for them. Living costs, nights out, and holidays are all expenses. Try to pay for expenses from your income or short-term savings.

It can be painless to pay for a meal in a restaurant on your credit card. But if you take a few months to pay off the credit card, the interest makes that meal more expensive every day the debt isn't paid off.

Use the savings calculator to work out how quickly you could save the money so you don't have to borrow it.

Michael Price

For Michael Price, the 2011 Canterbury earthquake brought a different perspective on his finances.

Read more about Michael Price

Know your options

If you decide you need to borrow money, make sure it costs you as little as possible. Even a small change in interest rates can make a big difference to the total you pay over time.

Check out all the different places you can borrow money. For example, it may be cheaper to get a loan from a bank than borrowing through a store or car yard. Once you’ve decided on the best borrowing option, think about:

  • How much you want to borrow.
  • How much interest and other charges you will pay.
  • How much your repayments will be.
  • How long you will be paying back the debt.
  • How often you will make repayments.
  • The total cost of the loan, which the lender must tell you by law. Are you sure you want to take on this debt?

Know the full cost before you borrow

Use the debt calculator to work out how much interest you’ll pay by the time you’ve cleared your debt.

Get out of debt fast

The longer you take to pay off debt, the more it will cost.

Check your budget to see if you can increase your debt repayments. If you have several debts, pay off the debt with the highest interest rate first, such as credit cards or hire purchase. You can use our money planner to make a budget, or if you already have one, you can check it on My Sorted.

Our debt calculator will help you work out how to pay back your debt faster.

Make a plan to reduce your debt

Make a list of all your debts and the interest rate you’re paying on each one. You’ll find the interest rates in your loan agreements or credit card bill. Identify which debt charges the highest interest.

See if you can make bigger repayments to pay off this debt faster. When it’s paid off, start paying more off the debt with the next highest interest rate.

Debt consolidation

If you have several different high-interest loans, talk to your bank about combining them into one lower-interest loan. This is called debt consolidation and it can make your monthly repayments easier to manage – but there are risks. If you end up repaying your new loan over a longer period than your original debts, you could pay more interest overall.

Find out more about debt consolidation.

Trouble repaying your debts?

If you’re having trouble paying back your debts, talk to the organisation that lent you the money as soon as possible. They may be able to work out a new repayment plan with you. You can also get free advice from a trained budget adviser from the New Zealand Federation of Family Budgeting Services. Call 0508 BUDGET (0508 283 438).