When consolidation saves you money, when it doesn't, and the three traps to watch out for.
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Written by Elena Hartford, AFC®Director of Member Programs · 6 min read · Updated
Debt consolidation isn't a trick — it's a trade. You exchange several high-interest balances for a single lower-interest loan, pay one monthly bill instead of five, and (usually) finish paying faster.
The simple math
If the APR on the new personal loan is lower than the weighted average APR of the debt you're paying off, consolidation almost always saves money. If it's higher, you're probably better off attacking the highest-APR balance first.
A worked example
Imagine three store cards:
$900 at 28.99%
$600 at 25.99%
$500 at 24.99%
Total: $2,000, weighted-average APR ≈ 27%. Consolidating that into a $2,000 Kovo Credit personal loan at 22.9% APR over 24 months would save roughly $180 in interest and simplify payments to one.
The three traps to avoid
Re-charging the old cards. If you consolidate and then run the cards back up, you now have double the debt. Cut up the cards or freeze them.
Stretching the term too long. A longer term lowers the monthly payment but increases total interest. Pick the shortest term you can comfortably afford.
Ignoring origination fees. Some lenders roll a 1%–8% origination fee into the loan. Factor that into your real APR before signing.
Consolidation only works if you also change the behavior that created the debt. Otherwise it's just moving the problem to a new address.