How to calculate debt consolidation savings
Compare two totals: the interest you'd pay on your current debts, and the interest plus fee on the new loan. In the example, your debts cost $11,851 in interest if you keep paying $555 a month. The loan costs $6,625, so you come out $5,226 ahead.
- Add up the balances you would pay off.
- Figure the interest on each debt at what you pay today. Keeping your total payment steady, as this tool does by default, moves each freed payment to the next debt.
- Size the loan. If the fee comes out of the loan, you must borrow more than you owe for the payoff to clear your debts.
- Add the loan’s interest and fee, then subtract that from the first total.
| Current debts | New loan | |
|---|---|---|
| Amount owed | $18,000 | $18,947 |
| Rate | 24.41% on average | 13.5%, or 16.31% APR with the fee |
| Monthly payment | $555 | $513 |
| Time to clear | 4 yrs 6 mos | 4 yrs |
| Interest | $11,851 | $5,678 |
| Fee | $0 | $947 |
| Total paid | $29,851 | $24,625 |
The trap: a lower payment that costs you more
A lower monthly payment isn't the same as saving money. At 120 months, the example loan cuts your payment from $555 to $289 and feels like relief. You'd also pay $16,622 in interest and fee, against $11,851 today. That's $4,771 more, for debt you'd carry 5 yrs 6 mos longer. The Consumer Financial Protection Bureau (CFPB) warns about this directly: your payment might be lower because you're paying over a longer time.
| Term | Monthly payment | Interest and fee | Against today |
|---|---|---|---|
| 24 months | $905 | $3,726 | Saves $8,125 |
| 36 months | $643 | $5,147 | Saves $6,704 |
| 48 months | $513 | $6,625 | Saves $5,226 |
| 60 months | $436 | $8,159 | Saves $3,693 |
| 72 months | $385 | $9,747 | Saves $2,105 |
| 84 months | $350 | $11,388 | Saves $463 |
| 96 months | $324 | $13,082 | Costs $1,231 more |
| 120 months | $289 | $16,622 | Costs $4,771 more |
In this example, the loan stops saving money past 87 months. Compare terms by total cost first, then pick the shortest one whose payment you can make every month.
What rate do you need for a consolidation loan to save money?
It has to be below a break-even rate that depends on the term and the fee. At 48 months with a 5% fee, the example loan saves money only below 24.39%. A longer term or a larger fee pulls that line down.
| Term | 0% fee | 3% fee | 5% fee | 8% fee |
|---|---|---|---|---|
| 36 months | 36.46% | 34.02% | 32.37% | 29.87% |
| 48 months | 27.47% | 25.63% | 24.39% | 22.51% |
| 60 months | 22.03% | 20.56% | 19.57% | 18.06% |
| 84 months | 15.79% | 14.73% | 14.02% | 12.94% |
Check how long a quoted rate lasts. The CFPB says many low rates on consolidation loans may be teaser rates that only last for a certain time. This tool assumes one fixed rate for the whole term.
How long does it take to pay off debt consolidation?
As long as the loan's term, unless you pay more. Keep sending the $555 you pay today, and the example loan clears in 3 yrs 8 mos instead of 48 months, for $6,043 in interest and fee. Ask whether the loan has a prepayment penalty before you plan on this.
That takes the lower rate without the lower payment. The tool's results show this figure whenever your current payment is above the loan's.
| Monthly payment | Debt-free in | Interest and fee |
|---|---|---|
| $513 | 4 yrs | $6,625 |
| $555 | 3 yrs 8 mos | $6,043 |
| $650 | 3 yrs | $5,091 |
| $800 | 2 yrs 4 mos | $4,159 |
| $1,000 | 1 yr 10 mos | $3,430 |
Which debts should you leave out?
Leave out any debt with a rate below the new loan's. Rolling it in raises its rate. Take $11,000 of card debt at 26.99% and a $14,000 car loan at 6.5%. Consolidating both costs $9,202 in interest and fee at 13.5%. Consolidating only the card and paying the car loan as usual costs about $5,932. Try it by removing a row above, and run the comparison both ways before you apply.
Be careful about the kind of loan, too. The CFPB says using a home equity loan to consolidate card debt is risky, because if you don't pay it back you could lose your home. The Federal Trade Commission gives the same warning about consolidation loans that use your home as collateral.
When a consolidation result can mislead you
The comparison assumes no new charges. The CFPB cautions that taking on new debt to pay off old debt may just be kicking the can down the road. If the cards fill back up, you'd owe them and the loan.
It also takes the rate at face value, though your actual rate and fee depend on your credit and lender, and you may not qualify. Lenders may look at your debt-to-income ratio. To study one loan offer in detail, use the personal loan calculator. To test paying your debts down without any loan, use the debt payoff calculator, and for one card, try the balance transfer calculator. If payments are out of reach, a reputable nonprofit credit counselor can go over your options. The Federal Trade Commission notes that nonprofit status doesn't guarantee services are free or affordable, so ask about fees first.
Common questions
Does debt consolidation lower my payment?
It can, but that alone doesn't mean it saves money. In the example, a 120-month term lowers the payment to $289 and costs $4,771 more overall.
How is this different from the personal loan calculator?
This tool starts from your debts and asks whether one loan beats them. The personal loan calculator starts from a loan offer and shows its APR and schedule.
Why is the loan bigger than my debts?
A fee taken out of the loan shrinks what you receive. To pay off $18,000 after a 5% fee, you borrow $18,947. If you'd rather pay the fee in cash, change that under advanced options.
Should I count my minimum payments or what I really pay?
Enter what you really pay. If that is the minimum, the tool shows how long that takes, though card minimums usually fall as balances do, so the true path can be slower.
What if I can’t qualify for a lower rate?
Then a loan may not help. Try the break-even table on this page: if your offer is above the line, compare it with paying your current debts in a set order using the debt payoff calculator.
Sources
- What do I need to know about consolidating my credit card debt? · Consumer Financial Protection Bureau
- How to get out of debt · Federal Trade Commission