Debt consolidation involves taking out a single new loan to pay off multiple existing debts. The primary goal is usually to secure a lower overall interest rate, simplify multiple due dates into a single monthly payment, or lower the monthly cash flow burden by extending the repayment term. However, it requires careful calculation to ensure the new loan doesn't ultimately cost more over its lifetime.
Weighted Average Interest Concept
To know if consolidation is mathematically beneficial, the APR of the new consolidation loan must be lower than the weighted average APR of your combined existing debts.
How to Use This Calculator
- List the balances, interest rates, and current monthly payments of your existing debts.
- Enter the proposed interest rate (APR) of the new consolidation loan.
- Input the desired repayment term (in months or years) for the new loan.
- Click Calculate to instantly compare your current trajectory versus the consolidated plan.
Frequently Asked Questions (FAQ)
Does debt consolidation hurt my credit score?
Initially, applying for a new loan triggers a hard credit inquiry, which may drop your score by a few points. However, successfully paying off high-interest revolving credit cards with an installment loan usually improves your credit utilization ratio, leading to a net positive effect on your score over time.
What is the catch with extending the loan term?
Extending the repayment term lowers your monthly payment, making budgeting easier. The "catch" is that you are in debt for a longer period. Even with a lower interest rate, a significantly longer term can result in paying more total interest compared to aggressively paying off the original shorter-term debts.