How to Use This Debt Consolidation Calculator

Getting a clear picture of your finances is the first step toward becoming debt-free. This tool is designed to be simple yet powerful. Follow these steps to see your potential savings:

  1. List Your Current Debts: In the first section, use the "Add Another Debt" button to create a row for each of your outstanding debts (e.g., credit cards, store cards, personal loans). For each one, accurately enter the total balance you owe, its annual interest rate (APR), and the minimum monthly payment you are currently making.
  2. Define Your Consolidation Loan: In the second section, enter the terms of a potential consolidation loan. The Loan Amount is automatically filled by adding up all your debts. You just need to enter the New Interest Rate you expect to qualify for and the New Loan Term in years (e.g., 3, 5, or 7 years).
  3. Analyze Your Custom Results: Click "Calculate Savings." The summary box will update instantly to show you a side-by-side comparison. Pay close attention to the Monthly Savings, which shows immediate cash flow benefits, and the Total Interest Savings, which shows the long-term financial advantage.

Understanding Debt Consolidation

Debt consolidation is a financial strategy where you take out one new, larger loan to pay off multiple smaller loans. The primary goal is to simplify your finances into a single monthly payment and, ideally, secure a lower overall interest rate than the average of your existing debts. This can significantly reduce the total amount of interest you pay and help you get out of debt faster.

Pros and Cons of Debt Consolidation

  • Pro - Simplicity: Instead of juggling multiple due dates, minimum payments, and interest rates, you only have one payment to manage each month.
  • Pro - Lower Interest Rate: If your credit is good, you can often secure a personal loan with a much lower interest rate than high-interest credit cards, saving you thousands.
  • Pro - Fixed Repayment Schedule: Unlike credit cards with variable payments, a consolidation loan has a fixed term. You know exactly when you will be debt-free.
  • Con - Requires Discipline: Once you pay off your credit cards with the loan, you must avoid running up new balances on those same cards. Otherwise, you could end up with even more debt.

Frequently Asked Questions (FAQ)

What is a weighted average interest rate?

The "Weighted Average Interest Rate" shown in our summary is the true average interest rate you are paying right now. It is calculated by giving more weight to debts with larger balances. For example, a $10,000 debt at 20% interest impacts your average far more than a $1,000 debt at 10%. This is the single most important number to beat with your new consolidation loan's interest rate.

Will debt consolidation hurt my credit score?

Debt consolidation can have a temporary impact on your credit score. Applying for a new loan creates a hard inquiry, which can dip your score slightly. Closing old credit accounts might also reduce your average account age. However, over the long term, making consistent, on-time payments on your new loan and lowering your credit utilization ratio can significantly improve your credit score.