This calculator shows your debt management options, estimated monthly payments for each option and the time it will take to become completely debt-free, depending on what you choose. Here’s how to customize your debt consolidation plan:
Enter the values for your various debts, not including student loans or your mortgage. Indicate your credit score range, state of residence, whether you rent or own and other relevant information such as your APR, home equity and any fees you may owe for debt settlement. Then, hit the ‘Calculate’ button.
See how to reduce what you owe through debt settlement, consolidation with a personal loan or by shifting balances with a balance transfer credit card. Compare your savings in terms of the total interest you’ll pay, the estimated amount of your monthly payment and how long it will take to pay off your debt in full.
Under ‘Time vs. Money’, view the bar graphs comparing the debt consolidation options side by side.
In the ‘Savings Breakdown’ section, compare how much money you can save through each of the three methods, and the limitations involved with each form of debt consolidation, versus continuing what you’re doing now.
Pros and cons of debt consolidation
Determining whether debt consolidation is the right approach for you depends largely on your individual financial circumstances. Before weighing your options, determine whether your credit score and debt-to-income (DTI) ratio are good enough to get you approved for a debt consolidation loan with favorable terms. The point of debt consolidation is to simplify multiple debts into one monthly payment at an interest rate lower than what you’re currently paying, and get you out of that debt faster. If you can’t secure a better interest rate, then a consolidation loan may not make sense.
Additionally, it is important to note that debt consolidation may not solve your problems, especially if you don’t change your spending habits. If you don’t decrease your expenses and make your payments each month, you’ll fall behind. Defaulting on your payments or making them late could cause you to lose assets you put up as collateral. You may also feel more financial stress, since you have a limited period of time to pay off your loan in full.
5 ways to consolidate your debt
Take out a personal loan: This type of unsecured debt isn’t backed by any assets, which means you won’t run the risk of losing your home, car or similar item if you default on it. As a result of lenders taking on more risk, personal loans may involve paying higher interest fees.
Tap your home equity: A home equity loan gives you the difference between the value of your property and the balance of the mortgage owed on it. You could use the lump sum to pay off your outstanding debts — however, you could also lose your home if you default on the loan.
Use a balance transfer credit card: While you could pay little to no interest during the promotional period offered on a balance transfer card, you will likely still have to pay a balance transfer fee. Still, it could work in your favor if you’re able to pay off your loan quickly.
Borrow from your retirement: If you have enough funds already saved up in your account, you could take out a loan from your 401(k) to cover your debts. While you would forfeit the interest that would have been paid on your account, you could get up to five years to pay back the funds without penalty. However, there are some tax implications involved. In addition to regular income tax on the amount you withdraw, you will also pay a tax when you withdraw it again in retirement.
Nonprofit debt consolidation or debt management plan: Rather than taking out a loan to pay off your debts, you could work with a nonprofit credit counseling agency to negotiate a lower interest rate and monthly payment from your credit card company.
FAQ: Debt consolidation
Debt consolidation is the process of merging several debts, each with their own payment schedule and interest rate, into a single combined debt with one monthly payment. This is typically done by taking out a loan to pay off existing debts and then paying off the new loan over a set period of time.
Ideally, consolidating your debt will help you save money by paying less interest and reduce financial stress by simplifying your payments.
If you have several types of debts and keeping track of payments is becoming difficult, or if you can’t make traction in your repayment plan because the interest rates are too high, you may want to consider debt consolidation. Those who have a good credit score and a strong debt-to-income (DTI) ratio could be eligible for loans with favorable terms.
If you don’t address the issues that caused you to get into debt in the first place, you could risk going deeper into debt or losing your home or other assets being used to secure your loan. You could also end up paying more in interest.
This depends on your individual financial circumstances, including factors such as your monthly income, credit score, homeownership and willingness to adopt healthy financial habits.
Your options could include taking out a secured or unsecured loan, using a balance transfer card, borrowing from your retirement funds or working with a nonprofit debt consolidation agency.
Once you decide to consolidate your debts, you should get all your paperwork together, including your latest credit score and a review of your financial history. Then research the offers available to you and shop around for the best rates on a personal loan or balance transfer card.
A personal loan makes sense if you can qualify for it with a better interest rate than what you are currently paying, thereby saving you money over the long run while simplifying your finances into one single monthly payment. You should also be committed to making the payments in full and on time every month for the duration of the loan.
The interest rate on an unsecured personal loan could vary between single digits to 36% depending on multiple factors, including your credit score and debt-to-income ratio. Keep in mind: The interest rate doesn’t take other fees into account. Your loan’s APR may be a better indicator of your cost of borrowing, depending on the lender.
They would only have a negative impact on your credit score if you are unable to make the monthly payments in full and on time. Hard credit inquiries from applying for a personal loan can also cause a dip in your score (typically about five points, according to FICO) and will remain on your credit reports for two years. Otherwise, showing a history of making payments on time can demonstrate your reliability as a borrower and could boost your credit score in the long run.
Nonprofit debt consolidation companies work with you and your creditors on a debt management plan, which may reduce the interest rates on your unsecured loans, such as credit cards.
A debt consolidation refinance involves using the difference between the current value of your home and the amount of your mortgage to pay off other outstanding debts. This option may require you to pay a variety of upfront closing costs and processing fees, so it’s important to do the math and make sure your interest rate will be low enough so that you will still save money with this option.
Credit card refinancing involves moving your balance from one credit card to another that has a lower interest rate. There is no repayment planning involved.
In contrast, debt consolidation involves setting up a monthly repayment plan. This may be achieved through several different ways: a home equity loan or line of credit; a debt management program where creditors agree to reduce penalties, interest rates and monthly payments; or a personal loan.
Consumers who choose to take out a loan would use it to pay off all outstanding debts, which could involve several credit card balances, and then pay off the loan in monthly installments over a set period of time.
Debt relief, also called debt settlement, involves negotiating with creditors to pay off less than what you actually owe. Settlement could damage your credit score. You also risk not being able to get credit from those lenders in the future, in addition to extra fees, penalties and even tax-related consequences. Debt consolidation involves paying off what you actually owe over a set period of time, but at one fixed interest rate and with a single monthly payment.
Deciding which option is best for you depends on a number of factors, including how much you owe, your credit score and DTI ratio, how much you might save with each option and, perhaps most significantly, your willingness to address the reasons for your debt and adopt healthy financial behaviors.