Types of loans

The main types of debt-consolidation loans are:

Credit cards

Banks from time to time offer special low rates of interest on debt transfers to their credit card. This is mainly suitable for smaller debts from other credit cards or store cards totalling less than $10,000. It works best if you can repay as much as possible during the special-rate period.

Recently Kiwibank and BNZ were both charging 5.99 percent for six months on credit-card balance transfers to their cards. After six months the standard rate on the Kiwibank Lowrate Mastercard is 13.3 percent and BNZ Lite Visa's is 13.75 percent.

Make sure you check the standard rate on the card. You may not gain much by transferring debt if you end up paying 20 percent or more after the special-rate ends. You should also check the annual fees on cards and close your former credit card so that you're not paying fees on more than one card.

See our Credit cards report for more information about credit card rates.

Unsecured loans

These can be standard personal loans or specifically designed for debt consolidation. They usually have set repayment periods and set monthly payments. There are also setting-up fees, which can be $150 or more. There may be charges for repaying early.

Interest rates vary widely. Banks, credit unions and building societies usually have a set interest rate for this type of lending, although it varies from institution to institution. Kiwibank, for instance, charges a lower rate on consolidation loans than standard personal loans, even though consolidation lending is riskier. The bank said it aimed to work with "consolidation" borrowers to help them improve their financial position and to become profitable customers

Some lenders, such as finance companies, charge according to how risky they think the customer is. Rates start in the low teens but can be much higher; GE Money's customer enquiry line quoted rates ranging from 14 percent to 32.25 percent depending on the borrower's "profile".

Mortgages

These offer some of the lowest interest rates for debt consolidation. In July the cost of floating-rate mortgages from most lenders was less than 11 percent, while two-year fixed rates started at around 9.2 percent from the major banks.

Lenders may allow borrowers to increase their mortgages to consolidate other debts. Or you could switch your mortgage to a lender charging a lower rate of interest than you're paying now and increase the mortgage at the same time to pay off credit cards and other loans.

Even though rates of interest on mortgages are low compared with most other types of borrowing, the total cost can still be high if you spread the payments over 20 or 30 years. In the long term, this can be the most expensive way to consolidate debt and as the debt is secured on your property, you run the risk of losing your home if you can't keep up payments.

You may be able to put your consolidated debt on to a shorter term than your main mortgage. You'll want to pay it off as quickly as possible. If you put this sort of debt on to a fixed-rate loan there are likely to be repayment charges for repaying within the fixed term.

See our Mortgages report for more information about mortgage lending.

Secured personal loans

These are a half-way house between a mortgage and an unsecured personal loan. The interest rates are generally lower than on an unsecured loan as you will be asked to put up an asset, such as a boat or a car, as security for the loan if you default. The repayment periods are similar to those for unsecured loans.