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How to Determine If Debt Consolidation Is Right For You

Lisett Comai-Legrand

Lisett Comai-Legrand About The Author

Jan 14, 2020 7:26:00 AM

Recently, we've been offering our debt consolidation calculator to anyone looking for information about debt consolidation. However, we also wanted to make sure that everyone understands how to use the calculator and what those results mean. Here is your step by step guide to using the debt consolidation calculator to determine if debt consolidation is a good option for you.

What is Debt Consolidation? 

Most people have debt, whether it's from credit cards, an auto loan or a mortgage. There is nothing wrong with having debt, but we all know life happens. When it does, you can end up with more debt than you can handle.  The ultimate goal of debt consolidation is to put all or most of your debts into one loan so that you have one low monthly payment. 

Now that you understand what debt consolidation is, let's go through how to use the calculator.


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Step 1: Enter Your Debts

Let's review the first section of our debt consolidation calculator:

what is debt consolidation

In the example above, we've entered a list of debts into Column A  and the current balance of each debt in Column B. In Column C, we filled in the interest rate for each debt. In Column D, we put in the monthly payment amount owed for each debt. 

At the bottom, there is a large red section titled Summary of Your Debts, where all the information we entered automatically totaled. In this example, the total credit card debt and medical debt is $35,300, the average interest rate is 16.59%, and the totaled monthly payments is $1,300. 

Columns E and F show the months and then the total number of years it would take to pay off each of the debts we listed.  In this example, we can see it would take approximately 5 years to pay off all the debt. Not only that, but Column G shows that the total interest for all these debts would be $11,641 over that time. Wow!

Before we go any further, let's review the key metrics:
  • Total Debt: $35,300
  • Average Interest Rate: 16.59%
  • Total Payment Amount: $1,300
  • Years to Payoff: 5 Years

Another thing to remember is that according to this example, I would be making 10 different payments to 10 different lenders in one month, many of them with different "Due By" dates. This can make budgeting very difficult.


Step 2: Compute Your Payments

This section of the calculator will show you approximately how much your debt consolidation loan monthly payment would be based on your total debts to be consolidated and your estimated credit score. 

debt consolidation calculation

The first line is Loan Amount, which is your total debt owed ($35,300, in our example). The debt consolidation calculator will auto populate this section for you based on the information you entered previously.

Next, select your estimated credit score from the drop down. Entering your credit score is important because interest rates are often based on your credit score. For this example, we selected an average credit score range of 661-680. Again, based on the information that has already be populated, the interest rate automatically populates. 

Next,  choose the loan's term length from the drop down. For this example, we used four years. When choosing the loan repayment term length, it makes sense to be realistic about what type of payment you would be comfortable with. Feel free to test all the term options to see how that will affect your monthly payment.

Once this information has be input into the calculator, it will generate your new monthly payment. In this example, the debt consolidation loan would have a monthly payment of $895.00.

Before we go any further, let's review the key metrics:
  • Total Loan Amount Based on Current Debt: $35,300
  • Average Interest Rate: 9.99%
  • Total Payment Amount: $895
  • Years to Payoff: 4 years

Step 3: Compare the Savings

This section of the debt consolidation calculator compares what your debts are now versus after a debt consolidation loan.  You will be able to compare the savings on monthly payment, years to payoff, and total interest paid.

Payment

Using our example, under Total Monthly Savings, users can see that payments would decrease from $1,300 to $895 each month - which would be a savings of $405 per month

In the Total Term Savings section, users can see that all debt would be paid off in 4 years instead of 5 years. In other words,  you could pay off your debt one year sooner.

By paying off your debt sooner, you'll also have to pay less interest. In the Total Interest Savings section, you can see a savings of $3,974 in interest  over the life of the loan by consolidating all debts owed into one payment.


Benefits of Debt Consolidation

So, in this hypothetical situation, a debt consolidation loan would benefit you in four ways:

1. You would save a lot of money. Instead of paying $1,300 a month for five years, you would be paying $895 per month for 4 years. That's a savings of $405 per month, which means you would have saved a total of $19,440!

2. You would get out of debt one year faster.  In addition to paying less interest, you would only have to pay off your debt consolidation loan for four years instead of paying off all your debts for five years. It's worth pointing out this can save you up to $15,600 in payments.

3. You would save on interest. Instead of paying $11,641 over five years, you would only pay $7,666 in interest over 4 years, saving you $3,974 in interest payments. 

4. You would save time and hassle. Instead of making 10 different payments to 10 different creditors, and various times of the month, you would only have to make one monthly payment to one lender on a date of the month you are most comfortable with. 


For even more information, check out our Facebook Live Debt Consolidation Q&A

 

Get a Debt Consolidation Loan With First Alliance Credit Union 

Debt consolidation can help save you money, time and interest, all while getting you out of debt faster.  I encourage you to take a moment and give our debt consolidation calculator a try. If you get stuck, just contact us and one of our awesome Loan Advisors can help walk you through it.

Lastly, even if our calculator shows  that a debt consolidation loan isn't the right option for you, get in touch with a First Alliance Credit Union Loan Advisor. We can work with you to help you get your finances back on track and under control. 


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