Understanding Debt Consolidation
What is Debt Consolidation?
Debt consolidation is a financial strategy that combines multiple debts into a single loan or payment. This approach can simplify your financial management and potentially reduce your overall interest costs. By consolidating your debts, you're essentially taking out a new loan to pay off existing debts, leaving you with just one monthly payment to manage.
When to Consider Debt Consolidation
Debt consolidation might be right for you if:
- You have multiple high-interest debts
- You're struggling to keep track of multiple payment due dates
- You want to simplify your monthly payments
- You can secure a lower interest rate than your current debts
- You have a good credit score that qualifies you for better rates
Benefits of Debt Consolidation
- Simplified Payments: One monthly payment instead of multiple payments to different creditors
- Potential Interest Savings: Lower interest rates can reduce the total cost of your debt
- Improved Credit Score: Consistent, on-time payments can help improve your credit score
- Better Budget Management: Easier to plan and manage your monthly budget
- Reduced Stress: Less worry about multiple due dates and payment amounts
Types of Debt Consolidation
Personal Loans
Unsecured loans that can be used to consolidate various types of debt. Typically have fixed interest rates and terms.
Balance Transfer Cards
Credit cards that offer low or 0% introductory APR periods for transferring existing balances.
Important Considerations
Before consolidating your debt, consider:
- Your current credit score and its impact on interest rates
- Any fees associated with the consolidation process
- Whether you can commit to the new payment schedule
- The total cost of the consolidated loan versus your current debts
- Your long-term financial goals and how consolidation fits into them
How to Get Started
Use our debt consolidation calculator above to:
- Compare your current debt situation with potential consolidation options
- Calculate potential monthly savings
- Determine the total cost of consolidation
- Make an informed decision about whether debt consolidation is right for you
How the Debt Consolidation Payment Is Calculated
A consolidation loan is repaid in equal monthly instalments, so the calculator uses the standard loan payment formula:
Monthly payment = P × r × (1 + r)n ÷ ((1 + r)n − 1)
- P is the amount you borrow, plus any fees added to the loan
- r is the monthly interest rate (APR ÷ 12 ÷ 100)
- n is the number of monthly payments
For your current debts, the calculator works month by month: each balance grows by its monthly interest and shrinks by your payment until it reaches zero. Adding up the interest from every month gives the true cost of staying as you are.
Worked Example: Three Cards Into One Loan
Say you owe $11,000 across three cards and pay $345 a month in total:
| Debt | Balance | APR | Payment | Paid off in | Interest paid |
|---|---|---|---|---|---|
| Credit card 1 | $6,000 | 22.9% | $180 | 54 months | $3,626 |
| Credit card 2 | $3,500 | 19.9% | $105 | 49 months | $1,637 |
| Store card | $1,500 | 26.9% | $60 | 38 months | $725 |
| Total | $11,000 | $345 | 54 months | $5,988 |
Now compare consolidation loans for the same $11,000 with no fees:
| Option | Monthly payment | Debt-free in | Total interest | Interest saved |
|---|---|---|---|---|
| Keep the three cards | $345.00 | 54 months | $5,988 | – |
| Loan at 11.9% APR, 48 months | $289.13 | 48 months | $2,878 | $3,110 |
| Loan at 9.9% APR, 48 months | $278.46 | 48 months | $2,366 | $3,622 |
| Loan at 11.9% APR, 60 months | $244.13 | 60 months | $3,648 | $2,340 |
The 48-month loan saves over $3,000 and frees up $56 a month. The 60-month loan has the lowest payment but costs $770 more in interest than the 48-month one and keeps you in debt longer. A lower monthly payment is not the same as a cheaper loan, so always compare total interest, not just the payment.
When Consolidation Does Not Save Money
- The new APR is not clearly lower than the average rate on your current debts
- Origination or balance transfer fees cancel out the interest saved
- You choose a much longer term just to lower the payment
- You keep using the cleared cards and build the balances back up
If consolidation doesn't work out, paying debts off in a planned order can still save a lot of interest. Compare the two classic methods with our debt snowball vs avalanche calculator.
Debt Consolidation Calculator FAQ
How do I calculate my debt consolidation payment?
Add up the balances you want to consolidate (plus any fees rolled into the loan), then apply the loan payment formula above using the new APR and term. The calculator on this page does this for you and compares it with what you pay today.
Is a lower monthly payment always better?
No. A longer term lowers the payment but usually increases the total interest. In the example above, stretching the loan from 48 to 60 months costs $770 more.
Does debt consolidation hurt my credit score?
Applying usually involves a hard credit check, which can cause a small, temporary dip. Over time, paying the new loan on time and lowering your card balances typically helps your score.