Use this free debt consolidation calculator to calculate the consolidation of debts such as credit card debts, auto loans, and more based on the real cost.
Debt 1
What is Debt Consolidation?
Debt consolidation is the process of taking out one new loan to pay off many smaller debts. Think of it like cleaning out your closet, instead of having clothes scattered everywhere, you put them all in one organized place.
With debt consolidation, you are taking all your scattered payments and combining them into one monthly payment, usually with a lower interest rate.
How Debt Consolidation Works
Let’s say you have three credit cards with different interest rates;
- A store card charging 24% interest with $3,000 owed
- A travel card at 19% interest with $5,000 owed
- A regular credit card at 22% interest with $4,000 owed
Instead of juggling these payments, you might get a debt consolidation loan at 12% interest for a total of $12,000. Now, you have got one payment and one due date, and you are paying less in interest.
Before Consolidation
| Debt Type | Amount | Interest Rate | Monthly Payment | Due Date |
|---|---|---|---|---|
| Credit Card 1 | $5,000 | 24.99% | $150 | 1st |
| Credit Card 2 | $3,500 | 21.99% | $105 | 15th |
| Store Card | $2,000 | 26.99% | $60 | 7th |
| Personal Loan | $4,500 | 18.99% | $175 | 22nd |
| Medical Bill | $3,000 | 12.00% | $100 | 30th |
| Total | $18,000 | Avg: 20.99% | $590 | 5 dates |
After Consolidation
| Debt Type | Amount | Interest Rate | Monthly Payment | Due Date |
|---|---|---|---|---|
| Consolidation Loan | $18,000 | 12.99% | $425 | 15th |
| Total | $18,000 | 12.99% | $425 | 1 date |
Note: This example assumes good credit score and qualification for a lower interest rate. Actual rates and savings may vary.
Types of Debt Consolidation Loans
Personal Loans
Banks and credit unions offer these loans specifically for combining debts. They usually have fixed interest rates and set payment schedules. The better your credit score, the lower your interest rate might be.
Balance Transfer Credit Cards
Some credit cards let you move debt from other cards, normally with 0% interest for a while (usually 12-18 months). Watch out, though, because if you don’t pay off the balance during this time, the interest rate might jump way up.
Home Equity Loans
If you own a house, you might borrow against its value. These loans usually have lower interest rates because your house acts as security. But be careful, if you can’t make payments, you could lose your home.
When Debt Consolidation Makes Sense
Consolidation works best when you have the following;
- Your credit score gets you better interest rates than what you are currently paying
- You’ve got a steady income to make the new payments
- You’re ready to stop using credit cards while paying off debt
- You’ve got a plan to avoid building up new debt
Real Talk About the Downsides
The Hidden Catches
Taking out a debt consolidation loan might feel like instant relief, but it’s not magic. You still owe the same amount of money; it’s just packaged differently. Some loans come with fees for setting them up or paying them off early.
The Long-Term Picture
A longer loan term means smaller monthly payments, but you might end up paying more in total interest over time. For example, stretching $20,000 of debt from 3 years to 5 years could cost thousands more in interest, even at a lower rate.
How To Make It Work
Create a Budget
Write down every dollar you spend for a month. Look for places to cut back – maybe skip eating out or cancel unused subscriptions. Put that extra money toward your debt.
Build an Emergency Fund
Save a little money each month for surprises. This helps avoid using credit cards when your car breaks down or you need a doctor visit.
Check Your Progress
Keep track of your loan balance monthly. Watching the numbers go down can help you stay motivated.
When to Get Help
Sometimes, debt feels too big to handle alone. Credit counselors may help you to create a payment plan and teach you money management skills. Look for non-profit credit counseling agencies if you can because they usually provide free or low-cost help.
After Consolidation Success
Once you’ve paid off the consolidation loan, you may do the following;
- Keep tracking your spending
- Save the money you used to spend on debt payments
- Check your credit score regularly
- Think twice or hard before taking on new debt