Debt consolidation combines multiple debts into a single loan, ideally at a lower interest rate. Instead of juggling several payments with different due dates and interest rates, you make one monthly payment to a single lender. This simplifies your finances and can save significant money if the new loan's rate is lower than your weighted average current rate.
When consolidation makes sense: Debt consolidation is most beneficial when you have multiple high-interest debts (like credit cards at 18-25% APR) and can qualify for a personal loan at a significantly lower rate (such as 7-12%). The bigger the rate difference, the more you save.
The math: This calculator compares your current total monthly payments and estimated payoff timeline against the consolidated loan's payment and term. The monthly payment for the consolidation loan uses the standard amortization formula: Payment = P × [r(1+r)^n] / [(1+r)^n - 1].
Types of consolidation: Personal loans are the most common method — you borrow a lump sum to pay off all debts. Balance transfer credit cards offer 0% introductory APR periods (typically 12-21 months) but require good credit. Home equity loans use your property as collateral, offering lower rates but putting your home at risk.
Warning: Extending your payoff timeline may lower monthly payments but increase total interest paid. Always compare the total cost, not just the monthly payment. The best strategy is to consolidate at a lower rate AND maintain your current payment level to accelerate payoff.
Combining three credit cards averaging 19.9% APR into a personal loan at 9.5% saves over $3,700 in interest.