Money guide · Credit scores and debt payoff
Is debt consolidation worth it? Compare total costs
Evaluate debt consolidation using fees, APR, repayment length, monthly affordability, and the risk of adding new debt.
How it works
A consolidation loan replaces several balances with a new obligation. A balance transfer moves eligible debt to another card. Neither erases the debt. Compare the final interest rate, introductory period, fees, term, and payment requirements. Turning unsecured debt into debt secured by a home changes the consequences of nonpayment.
A worked example
A $10,000 transfer with a 3% fee adds $300 upfront. If the promotional period is 12 months, paying the resulting $10,300 off evenly requires about $858.33 monthly, assuming no interest and no new spending. A $400 payment would leave substantial debt when the promotion ends. Model that remaining balance at the subsequent rate.
What to compare
Request the total financed amount and total payments, not just the advertised rate. A longer term can reduce the monthly payment while increasing the total cost. Check whether a fee is deducted from proceeds, which could leave less money available to pay existing creditors. Confirm that the budget supports the new payment without relying on future borrowing.
A common mistake to avoid
Paying off cards with a new loan and then filling the cards again can increase total debt. A consolidation plan should address the spending or income gap that produced the balances. Distinguish consolidation from debt settlement, where a provider may pursue a different process with different costs and consequences.
Does consolidation reduce the amount I owe?
Usually it reorganizes the debt rather than forgiving principal. Interest savings depend on the new rate, fees, term, and your payment behavior.
Sources and further reading
Connect this to inflation
Inflation changes the spending power of money over time. Read the related inflation explainer, or measure changes in buying power using your own assumptions.