Does a debt consolidation loan actually save money?
Paying off $10,000 of 24% card debt with a 12% loan over 36 months saves $4,089 once the 5% origination fee is counted, and the debt is gone 20 months sooner.
The worked example
$10,000 of card balances at 24% APR, paid at $300 a month, against a personal loan at 12% over 36 months with a 5% origination fee added to the loan. Below that, the same loan over 60 months.
| You put in | |
|---|---|
| Card balances | $10,000 |
| Card APR | 24% |
| Card payment | $300 a month |
| Loan APR | 12% |
| Loan term | 36 months (about 3 years) |
| Origination fee | 5% |
| Keeping the cards | |
| Cards: time to pay off | 56 months (about 4.7 years) |
| Cards: interest | $6,644 |
| The loan | |
| Origination fee in dollars | $500 |
| Amount borrowed | $10,500 |
| Loan monthly payment | $349 |
| Loan interest | $2,055 |
| Loan interest plus fee | $2,555 |
| Saved by consolidating | $4,089 |
| Debt gone sooner by | 20 months |
| The same loan over 60 months | |
| Monthly payment over the longer term | $234 |
| Interest plus fee over the longer term | $4,014 |
| Saved over the longer term | $2,630 |
Every figure on this page is computed from these inputs by the same calculator the channel’s Shorts use.
Run your own numbers
The calculator starts at the worked example. Change any figure to see yours.
Saved by consolidating
$4,089
Cards: interest
$6,644
Loan: interest + fee
$2,555
Loan payment: $349 a month for 36 months. The cards at $300 a month take 56 months (about 4.7 years).
Educational content, not financial advice.
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Your next moves
Get your real rate and fee
Use the APR and origination fee you are actually offered, then put them in the calculator above.
Compare two terms
The term you would choose and a shorter one: the shorter one usually costs less in total.
Weighing a balance transfer instead?
See what the fee and the promo deadline do to the saving.
Balance transfer
How the math works
A consolidation loan pays the cards off in one go and leaves one fixed payment with an end date. The trade is a lower rate for an up-front fee. Here the 5% fee is $500; it is added to the loan, so you borrow $10,500 and pay interest on the fee too.
The loan payment is set so the balance reaches zero after 36 months: $349 a month, $2,055 of interest and $2,555 once the fee is counted. Paying the cards as they are at $300 a month takes 56 months and $6,644 of interest, so the loan saves $4,089.
What people get wrong
Judging the loan by its monthly payment is the classic mistake. Here the loan costs $49 more a month than the cards, and it is still the cheaper choice because it ends 20 months sooner at a lower rate.
Stretching the term goes the other way: the payment drops but the interest climbs. Over 60 months the same loan costs $234 a month and saves only $2,630. The other risk is behavioural: once the loan pays the cards off, running them up again leaves you with both.
How to read the result
Look at the saving first, then the payment. The saving counts the fee, so a positive number means the loan costs less in total than the cards would. If it comes out negative, the fee and the term outweigh the lower rate.
Use the rate and fee you are actually offered, not an advertised range: the result is only as good as those two inputs. The calculator above is set to this example, so try the term you would pick and a shorter one before you compare offers.
Check the new payment too. Here it rises from $300 to $349 a month; if that is more than you can pay every month, the saving is out of reach, and a longer term or a smaller loan is the honest comparison.
Questions
Is a debt consolidation loan worth it?
When its interest and fee add up to less than the cards would cost. In this example the cards cost $6,644 in interest and the loan $2,555 with its fee, so the loan saves $4,089.
Does a longer consolidation loan save more?
No: a longer term lowers the payment but adds interest. Over 60 months instead of 36 months, this loan’s payment drops from $349 to $234, and its total cost rises from $2,555 to $4,014.
How does an origination fee work?
It is a percentage of the loan, here 5% or $500. This example adds it to the amount borrowed, so it also collects interest; some lenders take it out of the money you receive instead.
Interest compounds monthly at APR ÷ 12 and each payment lands at the end of the month, after that month’s interest. The origination fee is added to the loan, and the cards are not used again. Disclaimer