Debt consolidation loan vs. paying your cards: real numbers
A debt consolidation loan pays off several cards and leaves you with a single loan and a single payment. If the loan's rate is lower than your cards' rates, it can cut the interest. If the fee or the term are wrong, it can cost more.
We use the same three cards as in our avalanche vs. snowball guide: $10,700 in total, with rates of 29%, 18% and 24%.
The example
- Cards: $10,700 in total, paid with the avalanche method at $425 a month (minimums plus $200 extra) takes 34 months and about $3,626 in interest.
- Loan: 12% APR, 48 months, 5% origination fee. To receive $10,700 after the fee, you borrow about $11,263 (the fee is about $563).
Two ways to pay the loan
| Plan | Payment | Months | Interest + fee |
|---|---|---|---|
| Cards, avalanche | $425 | 34 | $3,626 |
| Loan, regular payment | $297 | 48 | $3,537 |
| Loan, still paying $425 | $425 | 31 | $2,451 |
Look at the second row: with the regular loan payment, the cost is nearly the same as paying the cards, because the loan stretches the debt over a longer time and the fee eats the savings. The real gain shows in the third row: if you keep paying what you were already paying ($425), the loan saves about $1,175 and finishes 3 months sooner.
Note: our calculator uses a single weighted-average APR (22.6% in this example), so it shows about $3,942 over 35 months for keeping the cards. The ~$3,626 over 34 months above comes from paying the highest-APR card first (avalanche), which costs less. The loan figures ($296.60/month, $3,537 total cost) are the same in both.
When a consolidation loan makes sense
- The loan's APR, fee included, is clearly lower than the average rate on your cards.
- You can keep paying the same amount and not just the lower required one.
- You will stop using the cards. Otherwise you end up with the loan and new balances.
When it doesn't
- The fee and a long term cancel the savings, as in the second row.
- Your cards already have low rates, or you can finish in a year or two without the loan.
- A 0% balance transfer would cost less. See is a balance transfer worth it?
Frequently asked questions
Is a debt consolidation loan a good idea?
It can be if the loan's total cost, including the fee, is lower than your cards' and you keep paying the same amount. In our example it saves about $1,175 if you keep paying $425.
Does a consolidation loan lower my monthly payment?
Often yes, but a lower payment usually means a longer term, which can cost the same or more in total.
What is an origination fee?
A one-time charge for making the loan, often a percentage of the amount, which is usually taken out of the money you receive.
What should I do with the cards after consolidating?
Avoid running balances again. The loan only helps if the cards stay at zero.
Compare a consolidation loan
Illustrative example, not financial advice. Figures use a simple monthly-interest model (APR ÷ 12 on the remaining balance). Your card issuer's statement may differ by a few dollars. Firchain AI is not a lender or a financial advisor.