A debt consolidation loan is a single personal loan you use to pay off several debts, leaving one fixed monthly payment. It is worth it when the new loan's total cost, including fees, is lower than what your current debts will cost you. If the rate is not lower, it is not worth it.

The top guides explain the idea and list the pros and cons, but none of them work a full side-by-side example. None compare the same debts paid off two ways with the total interest and the origination fee included. This guide does that maths, so you can copy the method onto your own balances.

Here is how it works. You borrow one lump sum from a bank, credit union, or online lender. You use that money to pay off all your existing debts. Then you repay the new loan in fixed monthly instalments over a set term, usually 2 to 7 years. Your payment stays the same every month, and you know the exact date you will be debt-free.

Worked example: three credit cards hold $4,000 at 24%, $3,000 at 22%, and $3,000 at 19%. The total is $10,000, and the weighted average rate is 21.9%. Paying that $10,000 off over 3 years at a 22% rate takes a fixed payment of $381.90 a month. The total paid is $13,748.56, and the interest is $3,748.56.

Now consolidate the same $10,000 into one loan at 12% over 3 years. The fixed payment is $332.14 a month. The total paid is $11,957.15, and the interest is $1,957.15. The saving is $1,791.41 in total, or $49.76 a month. After a 3% origination fee of $300, the net saving is $1,491.41. That is the number that decides whether the loan is worth it.

Your credit score decides your rate. Borrowers with a score of 720 or higher typically see rates of 7% to 12%, where consolidation almost always saves money. Scores of 680 to 719 typically see 12% to 18%, which usually still beats credit cards. Scores of 640 to 679 typically see 18% to 24%, where the saving may be small. Below 640, rates of 24% to 36% are common, and a consolidation loan may not save you anything at all.

Three risks can make consolidation backfire. First, running the cards back up: if you clear $10,000 of card debt and then charge $5,000 back onto the cards, you now owe $15,000 instead of $10,000. Second, a longer term: stretching the loan to 5 or 7 years can cost more total interest even at a lower rate. Third, fees: origination fees of 1% to 8% come straight off the top, so always compare the total cost after fees, not just the monthly payment.

If a loan does not work for you, compare the alternatives first. A 0% balance transfer card can beat a loan for debts you can clear within the promotional period. The snowball and avalanche methods pay debts off one by one without a new loan. A nonprofit debt management plan can cut your rates without new borrowing. Asking your current card issuers for a lower rate costs nothing and sometimes works.

Q: Is a debt consolidation loan a good idea?

A: Yes, when the new loan's total cost after fees is lower than your current debts' total cost, and you stop adding new card balances. No, when the rate is no lower than your cards.

Q: What credit score do I need for a debt consolidation loan?

A: A score of 660 or higher usually gets a competitive rate. Below 640, the rate may be as high as a credit card, and other options may save you more.

Q: Does a debt consolidation loan hurt my credit?

A: It can cause a small temporary drop from the hard enquiry, but paying on time and lowering your card usage usually improves your score over time.

Q: How much can I save with a debt consolidation loan?

A: On $10,000 of card debt at about 22%, a 12% loan over 3 years saves $1,791.41 before fees and $1,491.41 after a 3% origination fee.