If you’ve got a number of loans and are juggling a range of repayments, you might have wondered whether there’s an easier way. Sometimes, people with multiple debts opt for debt consolidation to combine them into one more manageable repayment.
This can be a helpful way to cut down on some of the “life admin” that comes with managing multiple loans and can sometimes save money if you’re able to achieve a lower interest rate or shorten the term of your loan.
But whether you will be approved for a debt consolidation loan is not based only on the amount of debt you’re carrying at the time you apply. Lenders will also look at your income and your expenses and make sure that repayments are genuinely affordable for you. They are legally required to do this – New Zealand lenders aren’t allowed to lend consumers loans that are unaffordable.
Here is what you need to know.
What is debt consolidation?
Debt consolidation is the process of combining multiple debts into a single personal loan, with just one regular payment. This can make it easier to keep track of and focus on repaying. It’s common to see people consolidate debt like credit cards, existing personal loans or even buy-now-pay-later balances that have become a problem.
It usually results in a simpler repayment structure, which makes budgeting easier, but it can also potentially mean lower interest costs if you have a lower rate on the consolidated loan or you’re able to pay the debt off more quickly.
Even though you’re already carrying the debt you want to consolidate, lenders still need to do their own assessment of your full financial position before they agree to your loan.
Why do lenders assess income and expenses?
New Zealand lenders providing credit and lending facilities to consumers operate under responsible lending rules that mean they have to confirm that any loan a borrower applies for is genuinely affordable. This means they need to consider how much the borrower is earning, what they spend on a regular basis and what is left over after all their existing financial commitments are met. They need to know that the loan is not likely to put a borrower into financial hardship.
How does income affect eligibility?
A big part of the assessment is income. Lenders like to see stable, reliable income that can be used to repay debt. Often, income from regular salaried or waged employment is viewed favourably because it’s consistent and easy to verify. Contract or casual workers may need to provide more information about their income over time to prove it’s consistent enough to be relied on.
People who are self-employed may need to provide more proof of income to show that it is reliable. Often, they’ll be asked to provide two years’ worth of financial records.
In some cases, it’s possible to qualify for a loan using income from a benefit or secondary income source, but lenders' appetites for this can vary. We can help you to determine what might be appropriate for your situation.
How does income level affect borrowing capacity?
If you have a higher level of disposable income after your expenses, it may make it easier to get approved for a loan and may increase the amount you’re able to borrow. A lower income won’t automatically disqualify you, but it could reduce the amount a lender will offer.
Documentation lenders typically require
Applying for a loan can involve providing a bit of information.
You’ll usually be asked to provide:
- Recent payslips or proof of income
- Bank statements for the past three months
- Tax records or financial statements for self-employed applicants – often two years’ worth of bank statements.
How do expenses affect your application?
Expenses are another key part of the picture. Lenders need to make sure that your expenses are not too high for you to be able to comfortably make the debt repayment.
How do other commitments affect the application?
If you have any other ongoing commitments, it may affect what you are able to borrow.
Things like child support payments, other loans and household responsibilities for dependents - such as childcare or school fees, for example – can all reduce the amount of disposable income you have available to service a loan. None of these things means you will definitely be out of luck, but they will be factored in as part of the assessment process.
Living costs
Lenders will also look at your living costs as a whole, such as your rent or board, your typical power and broadband bills, what you spend on groceries, transport and insurance. If you spend a lot on living costs relative to what you earn, it may reduce the amount you have left over for loan repayments.
Lenders will also look at your discretionary spending, such as on entertainment, dining out, subscriptions and other luxuries. You may be able to cut some of these in the months leading up to your application if you’re concerned about your chances of approval. Consistently high levels of discretionary spending may indicate to a lender that your budget is squeezed.
Existing debt repayments
If you have other debt that won’t be included the new loan, that will be part of the affordability calculation too. The higher your existing repayment obligations, the less space you may have in your budget for a consolidation loan.
Completing the picture, lenders will look at less regular expenses such as medical and healthcare costs, or costs for pets. Anything that is popping up semi-regularly will affect how lenders assess your monthly outgoings.
What do lenders look at in affordability checks?
There are a few things that lenders will look at when they’re checking your affordability.
Bank statements
Usually, lenders will want to look at your most recent three months’ bank statements to understand your spending patterns. They’ll be looking to make sure that your income and spending match what you’ve disclosed, and for signs of financial stress or problems. That could be things like reliance on overdrafts, any missed payments or habitual gambling.
Debt-to-income ratio
Lenders will look at how much money you owe compared to your gross income. A high debt-to-income ratio might reduce your chances of approval or mean you are offered a smaller loan.
Credit history
Lenders will also want to check your credit history. This shows whether you’ve had problems making repayments on time in the past, as well as any defaults or late payments. They can also tell whether you’ve made a number of recent credit applications, which could indicate stress. You may find that a good credit history helps your application even if your income is relatively modest.
Common reasons applications are declined
Having a loan application turned down can be disappointing. There are a few common reasons this happens.
- Not enough income: If your income is insufficient, the lender may not feel comfortable advancing the loan.
- Your living expenses are too high: If your expenses mean you have little money left over, this could be a problem for repayments.
- You have too much debt already: The lender will want to see that your existing debt is not too high relative to your income.
- Poor repayment history or defaults: Problems in your credit history can be an issue.
- Unstable or unverifiable employment: Lenders like to see a solid stream of reliable income coming in. If yours is unreliable, this may be a red flag.
- Frequent overdrafts: If you’re regularly going into unarranged overdrafts, this may indicate that your financial life is not well balanced.
You can improve your chances before you apply
There are a number of things that you can do to help your chances.
- Reduce your discretionary spending: In the months before you apply, try to cut down on any unnecessary luxuries. This will mean you have more disposable income left over, and make it more likely that the lender is comfortable that you have sufficient surplus to cover your debt repayment.
- Pay down smaller debts: If you have some small debts outstanding, it may be possible to reduce or clear these to improve your debt position.
- Avoid applying for new credit: Credit applications will show up on your credit file.
- Maintain consistent repayments: Even if you plan to consolidate your debts, it’s important to keep up the repayments to show reliable financial behaviour and meet your obligations.
- Get your documentation sorted: You can make the process smoother by getting the paperwork you need together early on. That could include pay slips, proof of income, proof of identification and bank statements – and records for the past couple of years if you’re self-employed.
Frequently Asked Questions (FAQs)
Can I do debt consolidation with a low income in NZ?
Yes, you may be able to. We can help you to determine which lenders might be willing to consider your application.
Do lenders check bank statements for debt consolidation applications?
Yes, lenders will put a debt consolidation application through the same steps as any other loan application.
Can high living expenses stop me from qualifying for debt consolidation?
They can do so if they are putting pressure on your disposable income.
Does applying for debt consolidation affect my credit score?
Yes, it may do; the application will be reflected on your credit history. However, if you make your repayments on time and clear your debt, it may improve your score over time.
Can self-employed people qualify for debt consolidation in New Zealand?
Yes, they may just need to provide more proof of income. We can help you to determine what you need.
How does my income type affect my consolidation eligibility?
Lenders need to see that you’ll have the capacity to make your debt repayments. A solid, reliable income is an important part of that.
Considering consolidation?
If you’d like to talk about whether debt consolidation is right for you, or how it might work, get in touch with us today. We’re lending experts and can help you to determine what might be appropriate for your circumstances. If you’d like to talk about your options, get in touch with the team at better finance™ today. We’re lending experts, and we’re here to help.
Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.
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