PmtCalcHow the comparison works
Current debts: each debt keeps its current monthly payment until it is paid off, with interest charged monthly at APR ÷ 12 and no new charges.
Consolidation loan: you borrow enough to pay every debt off. If the lender takes an origination fee out of the loan, you have to borrow a little more so the cash you receive still covers the payoff:
Loan amount = total debt ÷ (1 − fee %)
The loan is then repaid with a fixed monthly payment over the term. Its APR is the rate at which those payments repay only the debt you paid off, so it includes the fee.
Example
Three credit cards totaling $15,000: $8,000 at 24.99% ($240 a month), $4,500 at 21.99% ($135) and $2,500 at 27.99% ($85). Paying $460 a month as now, they are paid off in 4 years 10 months with $10,082.53 in interest.
A 48-month consolidation loan at 11.5% with a 4% origination fee means borrowing $15,625. The payment is $407.64, the APR including the fee is about 13.70%, and interest plus the $625 fee comes to $4,566.74. Consolidating saves $5,515.79 and lowers the payment by $52.36 a month.
Keep paying $460 a month on the new loan and it is gone in 3 years 6 months for $3,993.98 in interest and fees. Stretch the same loan to 84 months instead and the payment falls to $271.66, but the saving shrinks to $2,262.63 because you pay interest for 7 years.
When consolidation makes sense
- The APR is lower. Compare the loan's APR, which includes fees, with the average APR of the debts you are replacing.
- The term is not much longer. A lower payment over more years can cost more in total even at a lower rate.
- The old accounts stay paid off. Consolidating card balances only helps if the cards are not run back up.
If you would rather keep the debts and pay them down faster, compare the debt snowball and avalanche methods.
Frequently asked questions
Does a debt consolidation loan save money?
It saves money when the loan APR, including any origination fee, is below the rates on your current debts and the term is not so long that the extra years of interest outweigh the lower rate. This calculator shows both effects in the total interest and fees.
Why is the loan amount higher than my total debt?
Many lenders deduct the origination fee from the loan, so you receive less than you borrow. To still pay off every debt you have to borrow total debt ÷ (1 − fee). If the fee is charged separately, set the fee to 0 and add it to your comparison yourself.
Is a lower monthly payment the same as saving money?
No. A longer term lowers the payment but adds months of interest. Check the interest + fees row, not just the payment.
What about a balance transfer card instead?
A 0% balance transfer card can cost less if you can repay the balance before the promotional rate ends, but it usually charges a transfer fee of 3% to 5% and a high APR afterward.
Sources
- Consumer Financial Protection Bureau (CFPB): Credit cards (including balance transfers)
- CFPB: Regulation Z (Truth in Lending), 12 CFR Part 1026
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