How the Debt Consolidation Calculator Works
Debt consolidation means taking out one new loan and using it to pay off several old debts. You are left with one loan and one monthly payment, ideally at a lower interest rate. It can save money and simplify life, but it does not always save money. The Debt Consolidation Calculator compares what your debts cost as they are with what one consolidation loan would cost, so you can decide.
What you enter
- Your debts: for each one, the balance, the yearly interest rate and the minimum monthly payment. You can enter up to five. Leave a row empty if you do not need it.
- The consolidation loan: its interest rate, its term in months, and any origination fee, as a percentage of the amount you consolidate.
The two sides of the comparison
Your debts as they are. The calculator pays each debt with its own minimum payment, month by month, until it is gone. Interest is added each month on the balance. It adds up the interest and the total you pay. It also works out your average interest rate, weighted by balance. If a minimum does not even cover the interest, that debt would never be paid off, and the calculator tells you.
The consolidation loan. The new loan amount is your total debt plus the fee, because the fee is normally added to the loan. The payment uses the standard loan formula, where P is the loan, r is the monthly rate and n is the number of months:
fee = total debt x fee percentage new loan = total debt + fee payment = P x r x (1 + r)^n / ((1 + r)^n - 1)
The interest and fee you pay is the total of all payments minus the debt you had before. That way the two sides are counted the same way.
A worked example
You have four debts:
| Debt | Balance | Rate | Minimum |
|---|---|---|---|
| Credit card A | $6,500 | 24.99% | $195 |
| Credit card B | $2,800 | 19.99% | $84 |
| Store card | $1,700 | 26.99% | $60 |
| Personal loan | $4,000 | 12% | $140 |
The total is $15,000, the minimums are $479 a month, and the average rate is 20.82%. A consolidation loan offers 11.5% for 60 months, with a 3% fee ($450), so the new loan is $15,450.
| Debts as they are | Consolidation loan | |
|---|---|---|
| Monthly payment | $479.00 | $339.79 |
| Time to pay off | 58 months | 60 months |
| Interest (and fee) | $7,798.85 | $5,387.15 |
| Total you pay | $22,798.85 | $20,387.15 |
The loan lowers the payment by $139.21 a month and saves $2,411.70 overall, even after the fee.
Chart: what you pay in all
Debts as they are ██████████████████████████░░░░░░░░░░░░░░ $22,799
Consolidated ██████████████████████████░░░░░░░░░ $20,387
(dark: the debt itself, light: interest and fees)
Why the term matters
A longer term lowers the payment but raises the interest. The same $15,450 loan at 11.5%:
| Term | Monthly payment | Total you pay |
|---|---|---|
| 24 months | $724 | $17,368 |
| 36 months | $509 | $18,341 |
| 48 months | $403 | $19,348 |
| 60 months | $340 | $20,387 |
| 84 months | $269 | $22,564 |
At 36 months, the payment is $509.48, which is $30.48 more than your minimums today. But you would pay off the debt sooner, and the total is $18,341, which saves $4,457.60. At 84 months, the payment is very low, but the total is nearly the same as doing nothing.
When consolidation makes sense
- The new rate is clearly lower than the average rate of your debts.
- The fees are small, and you are not stretching the term much longer.
- You will stop using the credit cards you paid off. Running them up again leaves you with more debt than before.
- You want one simple payment, and you will not miss it.
When to be careful
- A longer term can cost more in total, even at a lower rate. Look at the total, not only the payment.
- Secured loans such as a home equity loan put your home at risk.
- Low-rate offers may not apply to you. The rate you are offered depends on your credit.
- Very small debts can sometimes be paid off faster with the snowball or avalanche method, without a new loan. Try the Debt Payoff Calculator too.
What this calculator does not include
- Changes in your credit score from opening or closing accounts.
- Balance-transfer cards with an introductory rate, which work differently from a fixed-rate loan.
- Prepayment penalties on your current loans, and late fees.
- New spending. The calculator assumes you do not borrow more.
This tool gives an estimate for general information only. It is not financial advice. Your lender's loan offer has the exact terms.