Certified financial coach specializing in debt management and consumer credit restructuring.
The **Debt Consolidation Savings Calculator** helps you determine the potential cost savings of rolling multiple high-interest debts into a single, lower-interest loan. Input any three variables (Current Monthly Payments, Consolidated Loan Amount, New Loan Term, or Total Interest Savings) to solve for the missing one, or calculate Total Interest Savings if all other three are entered.
Debt Consolidation Savings Calculator
Debt Consolidation Formula
The primary calculation is finding the new monthly payment ($PMT_{new}$) and comparing the total cost of the old and new debts.
$$PMT_{new} = P \left[ \frac{i(1 + i)^N}{(1 + i)^N – 1} \right]$$
Where $P$ is the principal, $i$ is the monthly rate, and $N$ is the number of months.
Savings: $$\text{Savings} = (\text{PMT}_{old} \times N) – (PMT_{new} \times N)$$
Formula Source: NerdWallet – Debt Consolidation Basics
Solving for the variables (Requires PMT function logic):
PMT_old (F) = (PMT_new × N + Savings) ÷ N
P (P) — Solved algebraically (Requires PMT_new first)
R (V) — Solved Iteratively (Find rate matching PMT_new or Savings)
N (Q) — Solved via Logarithms (Find term matching PMT_new or Savings)
Variables Explained
- F (Current Payments – PMT_old): The total monthly payments you currently make across all debts you plan to consolidate.
- P (Loan Amount – P): The total principal amount of the new, single consolidation loan.
- V (New Rate – R): The annual interest rate (%) of the new consolidated loan.
- Q (New Term – N): The repayment period of the new loan, measured in months.
Related Calculators
- Personal Loan Payment Calculator
- Debt-to-Income Ratio Calculator
- Credit Card Payoff Calculator
- Interest Rate Comparison Calculator
What is Debt Consolidation?
Debt consolidation is the process of taking out a new loan to pay off several other liabilities and debts, typically unsecured ones like credit cards or personal loans. The main goal is usually to secure a lower interest rate, which reduces the total interest paid, or to obtain a single, manageable monthly payment with a fixed term. This can simplify personal finances and provide a clear path to becoming debt-free.
Common consolidation methods include personal loans, balance transfer credit cards, or home equity loans (HELOCs). While it offers simplification and potential savings, it’s crucial to ensure the new loan’s interest rate and fees are genuinely lower than the weighted average of the old debts to ensure a net benefit.
How to Calculate Consolidation Savings (Example)
Scenario: Total Debts = $25,000. New Loan: 7.0% APR, 60 months. Old total monthly payment was $850.
- Calculate New Monthly Payment ($PMT_{new}$):
Using the annuity payment formula for P=$25,000, R=7.0%, N=60 months, the new monthly payment is approximately $495.04.
- Calculate Total New Debt Cost:
$$Total Cost_{new} = \$495.04 \times 60 \text{ months} = \$29,702.40$$
- Calculate Total Old Debt Cost (projected over 60 months):
$$Total Cost_{old} = \$850 \times 60 \text{ months} = \$51,000.00$$
- Determine Total Savings:
$$\text{Savings} = \$51,000.00 – \$29,702.40 = \mathbf{\$21,297.60}$$ (Note: This is an illustrative example assuming the old debt would have taken 60 months to pay off with the old $850 payments).
Frequently Asked Questions (FAQ)
In the short term, applying for a new loan can cause a small dip due to the hard inquiry. Long-term, consolidation can improve your score by reducing your credit utilization ratio and simplifying payment history.
What is the typical interest rate for consolidation loans?Rates vary widely based on your credit score and the type of loan (e.g., secured vs. unsecured). They typically range from 6% to 36% APR. The goal is to secure a rate significantly below your current weighted average debt rate.
Should I include the new loan’s fees in the calculation?Yes, for an accurate assessment, any origination fees, closing costs, or penalties for paying off old debt early should be factored into the overall cost of the new loan.
Is a longer term always better for consolidation?A longer term (more months) reduces your monthly payment, offering cash flow relief. However, it usually results in paying more total interest over the life of the loan. The calculator helps balance these two factors.