How much you can save with loan consolidation depends on many factors, including how much you owe, what interest rate you're paying, how many more payments you must make on existing loans and the terms of a consolidation loan. While some debt consolidation companies make amazing promises about savings, you can use a debt consolidation calculator to determine the numbers before choosing a consolidation plan.
Debt Consolidation Calculators
Bankrate, MSN Money and Free Online Calculator Use all provide free online calculators to help you figure out your debt consolidation options. Enter your debts, interest rates, and number of payments to calculate the amount you will pay in interest over time. Enter your consolidated payment, interest rates and any fees associated with the consolidation. The calculator can show how much you can save or how much extra you will spend. You can tweak the numbers to figure out what kind of debt consolidation arrangement will save you money.
Home Equity Loan
One common vehicle for consolidating debt is to take out a loan against the equity in your home. Your home's equity is equal to the current market value of your home minus the remaining principal balance on the mortgage. As of April 2011, home equity loan interest ranged from about 5 percent to 7.5 percent, depending on your credit rating. That's significantly lower than some credit card accounts, which may have interest rates from 10 percent to more than 20 percent. If you were paying 16.99 percent interest on $20,000 in debt and you were paying $600 a month, you could save more than $3,000 by getting a 6 percent home equity loan for that amount. Your payments would drop by $130 a month.
Credit Card Consolidation
Depending on how good your credit is, you might be able to get a low interest rate on a credit card. Some cards offer zero percent interest for a promotional period of up to two years for people with excellent credit. Taking the same $20,000 debt at 16.99 percent interest and transferring it to a zero percent interest card, you would save more than $7,000 in interest if you receive a 24-month interest-free offer and pay the debt off before the promotional rate expires. Your monthly payment would rise by about $200, however, and you would have to pay a balance transfer fee, which typically is about 3 percent, or $600.
Personal Loan
As of April 2011, the Federal Reserve Board reported average interest rates on non-revolving personal loans at 11 percent. Consequently, if you took out a 24-month, 11-percent personal loan from a bank to pay off your $20,000, you would pay $300 more a month but would ultimately save about $4,700 in interest. The cost of acquiring the loan should be included when determining the amount saved, however.
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