Does Debt Consolidation Save Money? How to Check
Compare paying several debts with one consolidation loan, including the origination fee and true APR, to see whether consolidating really saves money.
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Free tool: Debt Consolidation CalculatorDebt consolidation replaces several debts, such as credit cards and personal loans, with one new loan, ideally at a lower rate and with a single monthly payment. It can save money and simplify your finances, but fees and longer terms can quietly eat the savings. This guide shows how to compare the two paths properly, using the free Debt Consolidation Calculator.
What to compare
Look at the total cost of each path, not just the monthly payment:
- Keeping your debts: the interest you'll pay on each debt with your current payments.
- Consolidating: the interest on the new loan plus its origination fee.
A lower monthly payment that comes from a longer term can mean paying more in total.
Example: three debts
| Debt | Balance | Rate | Payment |
|---|---|---|---|
| Credit card | $8,000 | 22.9% | $250 |
| Store card | $4,500 | 19.9% | $150 |
| Personal loan | $6,000 | 12.0% | $200 |
Paying them as they are costs about $7,421 in interest.
A 5-year consolidation loan at 11% with a 5% origination fee taken out of the loan:
- To receive $18,500, you must borrow about $19,474, because the lender keeps the fee.
- The loan's true APR, with the fee, is about 13.26%, not 11%.
- Interest plus the fee comes to about $6,904.
Consolidating saves only about $517 here, despite the much lower headline rate, because of the fee and the five-year term.
When consolidation works
- The new rate is clearly lower than the average rate on your debts, after fees.
- You keep the term short, ideally no longer than it would take to repay the debts anyway.
- You don't run the cards back up. Consolidating, then spending again, leaves you with more debt than before.
Alternatives
- A 0% balance transfer card can be cheaper for card debt you can repay within the promotion; see Is a Balance Transfer Worth It?.
- The avalanche or snowball method pays debts down without a new loan; see Debt Snowball vs. Debt Avalanche.
- Nonprofit credit counseling can set up a debt management plan with lower rates.
How to use the Debt Consolidation Calculator
- Open the Debt Consolidation Calculator.
- List your debts: a name, the balance, the rate (APR) and the monthly payment for each. Add or remove rows as needed.
- Enter the consolidation loan: its rate, its term and the origination fee, and whether the fee is taken out of the loan or paid separately.
- Read the results: the new monthly payment, the interest plus fee with the loan, the loan's APR including the fee, when you'll be debt-free, and how the total compares with keeping your debts, with a chart of both paths.
Frequently asked questions
Does debt consolidation save money?
Only if the loan's interest plus fees is lower than what you'd pay on your current debts. Compare the totals; a lower rate alone isn't enough.
How does an origination fee change the loan?
If it's taken out of the loan, you must borrow more to receive the amount you need, and the fee raises the true APR. An 11% loan with a 5% fee has an APR of about 13.26% over five years.
Will consolidation hurt my credit score?
Applying causes a hard inquiry and a new account, which can lower your score a little at first. Paying off cards lowers your credit utilization, which often helps over time if you keep the balances at zero.