Debt Consolidation

How Debt Consolidation Works

New Monthly Payment = P × r / [1 − (1+r)^−n] · Savings = Current Total Interest − New Total Interest − Origination Fee

Origination Fee

The Hidden Cost — Personal loans typically charge 1-5% of the loan amount upfront, either deducted from the disbursement or added to the loan balance. A $10,000 loan with a 3% origination fee costs $300 immediately. Always factor this into the real break-even analysis to get an accurate picture of your true savings.

Break-Even

When Consolidation Pays Off — Divide the total upfront cost (origination fee) by the monthly savings to find the break-even month. If the fee is $300 and you save $75/month, you break even in 4 months. After that, every month of savings is pure financial gain.

Weighted Rate

Your Blended Interest Rate — If you have three debts at 22%, 19%, and 10%, your weighted average rate depends on the balance at each rate. Consolidation is most effective when your new rate is significantly below the weighted average of all existing debts. The new rate does not need to be lower than every individual rate to be beneficial.

How to Use

1. Enter up to 3 existing debts with their current balance, interest rate, and monthly payment amounts.
2. Enter the consolidation loan's new interest rate, term (in months), and origination fee percentage.
3. Review the side-by-side comparison of monthly payment, total interest paid, and payoff timeline for both strategies.
4. Check the "Total Lifetime Savings after fees" figure — this is the true bottom line that tells you whether consolidation actually saves you money.

Quick Reference

Common Uses

• •Compare your current total debt payments against a consolidation loan to see if rolling multiple debts into one actually saves you money.
• •Evaluate whether the interest savings from consolidation outweigh the origination fees and extended repayment term.
• •Determine the break-even point where consolidation fees are recouped through lower monthly interest charges across all debts.

Understanding the Result

Worked Examples

Frequently Asked Questions

When does debt consolidation NOT make sense?

Consolidation is counterproductive in several situations: (1) The new interest rate is not significantly lower than your current weighted average rate; (2) The origination fee is large relative to the interest savings, extending the break-even period too far; (3) You extend the term so much that higher total interest costs outweigh the monthly payment reduction; (4) You are already close to paying off the existing debts. Always check the "Total Lifetime Savings" figure rather than just looking at the monthly payment reduction, which can be misleading when the term is extended.

How does consolidation affect my credit score?

A consolidation loan triggers a hard credit inquiry that may temporarily reduce your score by 5-10 points. However, paying off multiple revolving credit card balances significantly reduces your credit utilization ratio, which accounts for 30% of your FICO score. Most borrowers see a net positive credit score impact within 6 months, provided they keep the paid-off cards open and do not accumulate new balances on them.

What credit score do I need for a personal loan?

To qualify for the most competitive personal loan rates (7-12%), most lenders require a credit score of 720 or higher. Borrowers in the 650-720 range typically receive rates of 13-20%. Below 650, rates often exceed 25-30%, which may make consolidation less beneficial or even counterproductive. Check pre-qualification offers from multiple lenders — these typically use a soft inquiry that does not affect your credit score.

How accurate is this calculator for real-world use?

This calculator uses standard mathematical formulas and provides estimates based on the inputs you enter. For financial decisions, always verify results with a qualified professional and check against official statements or lender-provided figures which may include additional factors not modeled here.

Pro Tips

• →Always compare the total cost (interest + fees), not just the monthly payment. A lower monthly payment over a longer term can cost more in total interest, even at a lower rate.
• →Check for prepayment penalties on both your existing debts and the new consolidation loan. Some lenders charge fees if you pay off early, which can erode your savings.
• →Your credit score determines your consolidation rate. Check your score before applying — rates can range from 7% (excellent credit) to 25%+ (poor credit). Improving your score by even 20 points can save thousands.
• →Use the Debt Payoff (Avalanche/Snowball) calculator first to see if keeping your current debts and accelerating payments beats consolidating — sometimes the math favors staying the course.

Limitations to Know

• •This calculator assumes you make all payments on time and exactly as scheduled. Late fees, missed payments, or rate changes (on variable-rate loans) are not modeled.
• •The origination fee is modeled as added to the loan balance. Some lenders deduct it from the disbursement or charge it separately — verify with your lender how the fee is applied.
• •Debt consolidation does not eliminate debt — it restructures it. Without addressing spending habits, many borrowers re-accumulate credit card debt within 2 years.
• •For secured consolidation loans (home equity, HELOC), failing to pay can result in losing your home. This calculator treats all debts as unsecured and does not model collateral risk.

Sources

• Consumer Financial Protection Bureau
• Investopedia