A debt-consolidation loan can save money, but it depends on more than whether the new interest rate is lower. The key question is: Will the total cost of the new loan be less than the cost of paying off your current debts?
Here are the main factors to compare:
| Compare | Current credit cards | Consolidation loan |
|---|
| Total balance | $ | $ |
| Interest rate(s) (APR) | % | % |
| Monthly payment | $ | $ |
| Time until payoff | Months | Months |
| Fees | Annual fees, etc. | Origination or other fees |
| Total amount repaid | $ | $ |
1. Calculate your current debt cost
Write down for each card:
- Current balance
- APR
- Minimum monthly payment
If you're only making minimum payments, it may take many years to pay off the balances, with a large amount going toward interest.
2. Look at the loan's total cost
Don't focus only on the advertised interest rate. Check:
- APR (which often includes certain fees)
- Loan term (e.g. 3, 5, or 7 years)
- Monthly payment
- Origination fee (often 1%–10% of the loan amount)
- Any prepayment penalty (many personal loans don't have one, but verify)
A longer loan term may lower your monthly payment but increase the total interest you pay.
3. Compare total dollars paid
For example:
-
Credit cards:
- Balance: $15,000
- Average APR: 24%
- Estimated total repayment if paid off over 5 years: about $25,000
-
Personal loan:
- Amount: $15,000
- APR: 10%
- 5-year term
- Total repayment: about $19,000
In this simplified example, the loan saves roughly $6,000 in interest.
On the other hand, if the loan has:
- a high origination fee,
- a long repayment period, or
- an APR close to your current card rates,
the savings may be much smaller—or disappear.
4. Consider your spending habits
Consolidation only improves your financial position if you avoid rebuilding credit-card balances afterward. If you consolidate the debt and then charge the cards back up, you could end up owing both the loan and new card balances.
5. Check whether you'll qualify
The advertised lowest APRs are usually reserved for borrowers with strong credit. Before deciding, get actual loan offers (or prequalification when available) and compare the APR you're offered—not just the advertised rate.
A simple rule of thumb
A consolidation loan is more likely to save money if:
- the loan APR is meaningfully lower than your average credit-card APR,
- fees are low,
- the repayment term isn't much longer than your planned payoff timeline, and
- you stop carrying new credit-card balances.
If you share:
- each card's balance,
- each card's APR,
- the minimum payments, and
- the loan amount, APR, term, and any fees,
I can help estimate whether the consolidation loan is likely to save you money and approximately how much.
