4.6.7 Consolidation loan

You can ask your financial institution about combining or "consolidating" your debts into one loan. The financial institution pays off all your debts and, in return, you make a single monthly payment to the institution. For this new loan to save you money, it must have a lower interest rate than the outstanding loans.

It is important to stop using any credit cards or lines of credit that you consolidated into the new loan, and to stop getting new credit. Destroying all but one of your credit cards will help you stick to the plan.

How debt consolidation works

Here's an example of how debt consolidation might work. Assume that you have the following debts:

Now assume that through your consolidation loan you will pay an interest rate of seven percent and make a monthly payment of $800. Here's how your payments would look with and without consolidation:

  Without consolidation With consolidation

You will be debt-free in

38 months

34 months

Principal paid



Interest paid



Fees paid



Total cost



Your monthly payment will be



Page details

Date modified: