Is a consolidation loan actually worth it?
A consolidation loan is sold on the monthly payment, which is nearly always lower. This prices the two things that decide whether it is a better deal: the rate once the fee is counted, and the term.
A worked example
Take $25,000 of card debt at 24% APR, paid at $750 a month.
A lender offers 12% over 60 months with a 5% origination fee. Rolled into the loan, the fee adds $1,250, so you borrow $26,250. Counting the fee, the loan really costs 14.2% a year.
Keep paying $750 to the cards
- Paid off in
- 4 yr 8 mo
- Interest
- $16,610
- Total paid
- $41,610
Consolidation loan at 12%
- Monthly payment
- $584
- Paid off in
- 5 years
- Interest and fee
- $10,035
- Total paid
- $35,035
The loan frees $166 a month and costs $6,575 less in total. Both numbers favor it here.
The term changes that. At 36 months the payment is $872 and interest and fee come to $6,388. Stretch it to 84 months and the payment drops to $463, but the cost climbs to $13,924.
These figures come from the same math as the calculator above, so the two always agree.
How this calculator works
You enter your debt, its APR, your current monthly payment, the loan’s APR, its origination fee, and the term.
It adds the fee to the amount borrowed, then works out the level payment that clears the loan over the term. From that payment it solves for the rate a no-fee loan needs to match it. That is the effective APR.
For the cards, it applies your current payment each month at the card APR until the balance reaches zero.
It compares total paid on both paths and shows every common term from 24 to 84 months, so a lower payment never hides a higher cost.
Some lenders take the fee out of the loan instead of adding it. Then you have to borrow more to clear the same debt, and the cost works out about the same.
What decides whether it is worth it
The rate after the fee. A loan at 11% with a 5% fee can cost more than one at 12% with no fee. Compare offers on the effective APR.
The term. A longer term lowers the payment and raises the total. Pick the shortest term whose payment you can keep making.
The cards afterward. A loan pays the cards off, and the cards are then empty. If they fill up again, you have the loan and the card debt together.
Questions people ask about consolidation loans
- Does a consolidation loan hurt my credit?
- A little, briefly. The application adds a hard inquiry and the new account lowers the average age of your accounts. Paying the cards to zero lowers your utilization, and that usually helps more over the following months.
- Is a balance transfer better than a loan?
- Sometimes. A 0% transfer offer usually lasts 12 to 21 months with a fee of 3% to 5%. If you can clear the balance inside that window, it often costs less. If you cannot, the rate afterward is usually a card rate again.
- What rate will I get?
- Lenders price the loan on your credit score, income, and debt-to-income ratio. Prequalification with a soft credit check shows a rate without affecting your score. Use a real quote in this calculator, not an advertised range. To see the ratio lenders check, try thedebt-to-income calculator.
- What if the loan costs more than the cards?
- Then the lower payment is the only thing you are buying. That can still be worth it if the card payment is unaffordable, but price it as a trade. A shorter term, a lower fee, or a different lender often closes the gap.
- What if I cannot qualify for a lower rate?
- A nonprofit credit counseling agency can set up a debt management plan. The agency asks your card issuers to lower the rates, and you make one payment to the agency. To compare paying the cards on your own, try thedebt payoff planner.