Debt Consolidation: When Does It Make Sense?
When you are juggling multiple credit cards, store cards, and personal loans, the complexity alone can be overwhelming. Each debt has its own payment due date, minimum payment threshold, and APR. This is where debt consolidation enters the conversation: taking out a single new loan to pay off all your existing smaller debts, leaving you with a single monthly payment, a fixed repayment term, and hopefully a lower interest rate. But when does it actually make sense, and what are the hidden traps?
The Mathematics of Consolidation
To determine if debt consolidation is mathematically viable, you must first calculate your current weighted average interest rate. For example, if you have three credit cards totaling £10,000 at 22% APR and a store card of £2,000 at 29% APR, your average interest rate is extremely high. If you can obtain a debt consolidation loan of £12,000 at a fixed 8% APR, the maths is overwhelmingly in your favour. You will pay substantially less interest every month, and more of your monthly payment will go toward principal reduction.
Run the numbers yourself with our Debt Consolidation Comparison Tool to see whether switching to a personal loan would save you money.
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About the Author
Steve, Founder of REPAYLY
Steve spent 7 to 8 years working directly inside the financial sector before moving into Cyber Security. He designed REPAYLY to make obscure compounding interest equations completely transparent and accessible, helping everyday families manage their budgets and accelerate their path to financial freedom.
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