Debt Consolidation Loan: When It Saves Money, When It Doesn’t
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Consolidating $15,000 of credit card debt at 24% APR into a 12% personal loan saves about $1,800/year in interest. Sometimes. Other times it costs you more. Here’s how to tell which one applies.
The Math That Determines Success
Run this calculation before consolidating:
“` Total interest you’d pay on credit cards (paid off in same timeline)
- Total interest on consolidation loan
- Origination fee
= Net Savings “`
If negative, don’t consolidate. If under $500, probably not worth the hassle. If $1,000+, do it.
When Consolidation Wins
- Your average credit card APR is 20%+ and the loan APR is under 15%
- You can pay off the consolidation loan in 24–48 months
- You won’t run the cards back up
- The origination fee is under 4%
When It Loses
- You stretch the loan to 5–7 years for lower monthly payments → pay more total
- You re-use the credit cards after paying them off → now you have BOTH debts
- Your credit score is so low the loan APR matches your card APR
- Origination fee plus interest exceeds card interest
The Discipline Test
Be honest: could you just pay off the cards as aggressively? If the answer is yes, do that. Consolidation is for situations where the simplification and lower rate together prevent default — not just for psychological comfort.
Alternatives to Consider
- Balance transfer card: 0% APR for 15–21 months. Better if you can pay off within the promo period.
- HELOC: Cheaper rates if you have home equity, but turns unsecured debt into secured.
- Debt management plan (DMP): Non-profit credit counseling, fixed monthly payment, often reduces interest rates with creditor cooperation.
Red Flags in Consolidation Offers
- “Pay only what you can afford” rhetoric — usually debt settlement, not consolidation
- Pressure tactics or limited-time deals
- Upfront fees before loan funds
⚠️ Watch Out: “Debt consolidation” and “debt settlement” are completely different. Settlement destroys your credit and may trigger tax liability on forgiven amounts.