Debt Consolidation Calculator

Worked example

$12,000 at 24.5% and $8,000 at 11% blend to 19.1%. Paying $650 a month clears them in 42.6 months and costs $7,695 in interest. A 13.5% loan over four years has to be $21,053 to cover the 5% fee, costs $7,309 all in and takes the payment to $570 — a saving of $387, on a payment $80 lower.

How to work it out yourself

1. 1.Compare total cost, not the monthly payment. A consolidation loan almost always lowers the payment, because it stretches the term — that is not a saving, it is a slower repayment.
2. 2.Put the origination fee in. Personal loans marketed for consolidation commonly charge 1% to 8% up front, and a 5% fee on $20,000 is $1,000 before a single payment.
3. 3.Keep the cards at zero afterwards. The failure mode is not the loan: it is the balances rebuilding on the cards you just cleared, leaving both.
4. 4.A 0% balance transfer beats this arithmetic outright when the debt clears inside the promotional window and the transfer fee is 3% or less. It stops beating it the day the promotion ends.

What the loan rate has to be to be worth it

Against the blended rate on the debts as entered. Where the saving goes negative, the loan costs more than carrying on.

The formula

1. Total debt12000 + 8000
2. Paying a month now400 + 250
3. Blended rate you pay now(12000 * 24.5 + 8000 * 11) / 20000
4. Months to clear at what you pay nowlog(650 / (650 - 20000 * 0.0159167)) / log(1 + 0.0159167)
5. Interest if you carry on650 * 42.608326 - 20000
6. Origination fee20000 * 5 / 100
7. Loan you need, fee included20000 / (1 - 5 / 100)
8. Consolidation payment a month21052.632 * 0.01125 / (1 - pow(1 + 0.01125, -48))
9. Interest on the loan570.02785 * 48 - 21052.632
10. Interest plus fee6308.7053 + 1000
11. What consolidating saves7695.4119 - 7308.7053
12. Change in the monthly payment570.02785 - 650
13. Months sooner it clears42.608326 - 48

Source: CFPB — debt consolidation and credit counselling, Federal Reserve — consumer credit interest rates (G.19)

Questions people actually ask

Does debt consolidation actually save money?

Only if the new rate, after the fee, beats the blended rate you are paying now and you do not stretch the term to get there. On the figures above the cards alone are at 24.5%, so a 13.5% loan wins even with a 5% fee — but the same loan over seven years instead of four gives most of that saving back.

What is a blended rate?

Each balance weighted by its size, not the average of the rates. $12,000 at 24.5% and $8,000 at 11% blend to 19.1%, not 17.75%, because more of the money is on the expensive card.

Will consolidating hurt my credit score?

The application is a hard inquiry and the new account lowers your average account age, so expect a small dip. Utilisation usually improves as the cards go to zero, which typically outweighs it within a few months — provided the cards stay at zero.

Is a balance transfer better than a consolidation loan?

When you can clear the debt inside the 0% window, yes: a 3% transfer fee on $20,000 is $600 against several thousand in interest. When you cannot, the rate that applies afterwards is usually a card rate, and the loan is the safer instrument.

Related

• Credit Card Payoff CalculatorHow many months a card balance takes to clear at a fixed monthly payment, and what the interest costs.
• Loan Payment CalculatorMonthly payment and total interest on any fixed-rate instalment loan — car, personal or student.
• Debt-to-Income Ratio CalculatorFront-end and back-end DTI from your monthly debts, plus the largest housing payment that still fits under each lender ceiling.
• Interest CalculatorWhat a balance grows to under simple and compound interest, with the gap between the two shown as its own figure.
• Mortgage Payment CalculatorMonthly principal-and-interest payment on a fixed-rate mortgage, plus total interest paid over the full term.
• Amortization CalculatorFull payment schedule for a loan, with the option to pay biweekly or add extra each month and see what it saves.

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