Why calculate carefully

A lower monthly payment doesn’t always mean you save money. True savings come from a lower total cost after accounting for interest, fees, and any change in payoff timing. Below are clear steps, a numeric example, and factors to watch.

Step-by-step calculation

  1. Inventory your debts
  • List each balance, current interest rate (APR), minimum or scheduled monthly payment, and remaining term (if amortizing).
  1. Calculate the current total cost
  • For amortizing loans (most personal loans, auto loans): use an amortization calculator or formula to find remaining interest and payments.
  • For credit cards (revolving): estimate payoff time using your current monthly payment or decide on a target payoff horizon (e.g., 36 months) and calculate the total payments at current APR.
  • Sum remaining payments and interest for all accounts to get your current total cost.
  1. Calculate the consolidated loan cost
  • Get the quoted APR, loan term (months), and any origination fee or closing costs. Compute the monthly payment with the standard amortizing loan formula or an online calculator. Total consolidated cost = monthly payment × number of months + upfront fees.
  1. Compare totals and cash flow
  • Total savings = (current total cost) − (consolidated total cost).
  • Monthly cash-flow change = (current monthly payments) − (new consolidated monthly payment).
    Note: A smaller monthly payment may lengthen your payoff and change total interest.

Numeric example (accurate comparison)

  • Current debt: $20,000 average APR 18%. Borrower now pays $600/month.
  • Monthly card rate r = 0.18/12 = 0.015.
  • Using the amortization formula, continuing $600/mo pays off in ~47 months. Total paid ≈ $27,942; interest ≈ $7,942.
  • Consolidation loan: $20,000 at 10% APR for 60 months.
  • Monthly payment ≈ $425; total paid = $425 × 60 = $25,500; interest ≈ $5,500.
  • Gross savings: $27,942 − $25,500 = $2,442 (interest + principal timing difference).
  • Adjust for fees: if the loan charges a 3% origination fee ($600), net savings ≈ $2,442 − $600 = $1,842.
  • Cash-flow benefit: monthly payment drops by about $175.

Key adjustments and real-world caveats

  • Fees: include origination fees, balance-transfer fees, or prepayment penalties on existing loans.
  • Term effects: lengthening the repayment term often reduces monthly payments but can increase total interest if the APRs are similar.
  • Variable-rate cards: future rate increases can raise the current-cost estimate — conservatively model a rate rise scenario for credit cards.
  • Secured vs. unsecured: consolidating unsecured credit-card debt into a secured loan (like a HELOC) lowers APR but risks your home.
  • Lost benefits: closing paid-off credit cards can reduce available credit and affect credit utilization and rewards points.
  • Taxes: personal loan interest is generally not tax-deductible (unlike some student or mortgage interest); verify with the IRS or a tax professional.

Tools and resources

  • Use an amortization calculator or spreadsheet to get exact numbers.
  • Consumer Financial Protection Bureau (CFPB) guides on debt and repayment choices for unbiased help (consumerfinance.gov).

Internal resources

Common mistakes to avoid

  • Equating lower monthly payment with total savings without subtracting fees.
  • Ignoring the possibility of adding new debt after consolidation.
  • Failing to check for prepayment penalties on the debts you plan to pay off.

Final checklist before you sign

  • Calculate total current cost and consolidated total cost side-by-side.
  • Add all fees and projected rate changes.
  • Confirm no important benefits are lost (e.g., deferred student loan relief).
  • Check how the change will affect your credit utilization and score.

Professional note and disclaimer

In my practice I often see clients who feel immediate relief from lower monthly payments but later regret longer terms or hidden fees. Run the numbers first and consider working with a certified credit counselor or financial planner.

This content is educational only and does not replace personalized financial or tax advice. For personal guidance, consult a licensed financial professional. For official consumer guidance, see the Consumer Financial Protection Bureau (https://www.consumerfinance.gov/).