Debt Consolidation Calculator – How to Calculate
Are you finding it tough to manage multiple debts? A debt consolidation loan could be a solution to help you bring all your debts together into one loan.
In this article, we aim to help you unravel the mystery of debt consolidation loans. Each month, our website guides over 170,000 people through their money worries. We will explore:
- What exactly is a debt consolidation loan.
- How to determine whether you are eligible for one.
- Understanding the true cost of a poor debt consolidation loan.
- How to apply for a debt consolidation loan with poor credit.
- Frequently asked questions about debt consolidation loans.
We understand that dealing with unpaid debts can be a daunting task, but rest assured that we’re here to help. Let’s journey through the world of debt consolidation loans together.
Is it a Good Idea to Consolidate Debts?
Consolidating your debts might be a good idea for some but might not be an effective way to manage debt for others. It all depends upon your financial standing and preferences.
Debt amalgamation is a good way to get rid of various debts that are constantly sucking money out of you like a leech. Having a small and medium debt usually causes you to pay a higher interest rate.
If you are unable to pay back the principal amount, I suggest you consolidate your debts.
There are many pros of debt consolidation. I have listed some of them below:
1. Lower Interest Rate
Credit cards, short-term loans, and other small miscellaneous borrowed amounts can make up a higher interest rate (APR).
However, if you join them all together and take a personal debt consolidation loan, the interest rate could drop down in a significant manner.
For example, you may get a specialist credit card with 0% interest that allows you to transfer your credit card balances to this new card so that you owe this card but at 0% interest.
2. Fixed Payment Amount and Period
You will not have to worry about different due dates and the calculation of various payments in a month. It will be effortless for you to make a budget for your loan and pay it on a fixed due date and in a fixed amount.
Just put a standing order for payment, and you are good to go—no more hassle for different calculations and debt budgeting.
3. Positive Effect on Your Credit Score
Getting a consolidation loan has its benefits, but due to this loan, you will be able to simultaneously improve your credit rating.
If you were to pay different debts to different lenders, you are more likely to miss the monthly payment.
By paying back to one lender, you have more chances of making a timely monthly payment. This will have a massive impact on your payment history, which weighs for almost 35% of the credit scoring given by the Financial Conduct Authority.
4. Earlier Repayment
The consolidated loan has a fixed monthly payment schedule, which helps pay off the initial debt amount sooner.
If you have a substantial amount of credit card debt, one thing you might know is that they have no time limit on the monthly payment, thus making it difficult to follow a strict monthly debt payment system and also increasing the interest payments.
There might be some drawbacks to amalgamating a loan as well. Usually, these include loan application costs and balance transfer fees, which I have discussed at length here.
Average Interest Rates for a Debt Consolidation Loan
The interest rate will depend on several important things.
It will vary for every person, and you might be able to get a higher or lower interest rate depending on the following criteria:
1. Credit Score
The most important thing that banks and lending institutions usually look at is your credit rating or score.
The interest rate and allowance of a consolidation loan will heavily depend on your credit status.
If you have a credit score between 880-960, it is a good credit rating, according to Barclaycard. With this kind of credit score, you will be able to secure the loan at a fairly low interest rate, ranging from 11-15% on average.
A credit rating higher than this will make it a piece of cake for you to avail of an interest rate of around 8%-10%.
2. Loan Amount & Payback Period
The rate of APR also depends on the loan. If you are looking for a small amount of loan, you might get quoted a high rate of interest by the lender.
On the other hand, if you are looking for a fair amount of loan, you will be able to bag a lower interest rate.
The logic of this scheme is that lending institutions can grab better profits on long-term and larger loans compared to short-term loans. Hence, to increase their profits in the short term, they quote higher interest rates.
Long-term loans with bigger amounts will fall between 15%-20% (with a fair credit rating), and short terms debt loans can vary between 20-25%.
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Debt Consolidation Calculators
The easiest way to determine whether consolidating debt is right for you is by using the debt consolidation calculator.
This calculator will work out your consolidation amount, interest rate, and estimated monthly payment.
You just need to enter your pending dues, credit card balance (if any), and all the other debts that you owe. The debt consolidation calculator will quickly sum up the debts and give you consolidation quotes.
There are many free debt calculators, such as Calculator.net, which has a pretty good debt calculator. You can also get the debt calculator from the lending institution site you choose to get a debt loan.
Lender |
APRC |
Monthly payment |
Total amount repayable |
|---|---|---|---|
| United Trust Bank Ltd | 5.99% |
£218.73 |
£26,247.92 |
| Pepper Money | 6.86% |
£220.24 |
£26,429.17 |
| Together | 6.95% |
£220.40 |
£26,447.92 |
| Selina | 7.5% |
£221.35 |
£26,562.50 |
| Equifinance | 7.7% |
£221.70 |
£26,604.17 |
| Spring | 10.5% |
£226.56 |
£27,187.50 |
| Loan Logics | 11.2% |
£227.78 |
£27,333.33 |
| Evolution | 11.28% |
£227.92 |
£27,350.00 |
Representative example: If you borrow £34,000 over 15 years at a rate of 8.26% variable, you will pay 180 instalments of £370.70 per month and a total amount payable of £66,726.00. This includes the net loan, interest of £28,531.00, a broker fee of £3,400 and a lender fee of £795. The overall cost for comparison is 10.8% APRC variable. Typical 10.8% APRC variable.
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Does Debt Consolidation Loans Make Sense?
Consolidating your debts is a good finance technique. But to do it correctly, you need to understand how and which debts to consolidate.
Only consolidate your debt if:
- You will save money even after the fees and charges of the loan have been paid.
- You can afford to keep up payments until the loan is repaid
Lastly, seek advice from an independent debt charity like Citizens Advice or National Debtline. They will assess your situation and guide you to a more suitable option for clearing your debts.
Debt consolidations loans for all purposes
- Stuck paying high interest on credit card debts & loans?
- Looking for a better interest rate?
- Stuck with the confusion of multiple repayment plans?
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FAQs
How much debt can I consolidate?
It depends on you and the lending institution you will get the loan from. The allowance of the loan will determine how much debt you can amalgamate, and it depends on your credit score and previous monthly payment history.
I would advise you to consolidate only the high-interest rate debts, such as credit card and other short term debts. Do not get yourself into a long-term debt that you can not manage and get out of.
Can I consolidate credit card debt?
Yes! You can consolidate your credit card debt. For instance, if you are paying 20% interest on your credit cards, consolidating them may drop the interest to 10%-15%, thus saving you a lot of money.
Do debt consolidation loans hurt my credit score?
If not managed properly, they might harm your credit score, but it also allows you to increase your credit score positively. If you manage the loan and arrange the payment amount timely, your credit score might improve!
Why does my credit score matter to get a consolidation loan?
Your credit score is a reflection of your debt management skills. If you have a fair or good debt record, that means creditors are more likely to trust you and lend you a loan.
The credit score is not only crucial for consolidation, but it has overall importance while availing any type of credit.
Are debt consolidation calculators reliable?
Fairly. By using a debt calculator, you can easily calculate various things related to the loan. For instance, the interest payable and the monthly payment amount.
These calculators are quite reliable, just like any other calculator. However, always take their results with a pinch of salt as they are estimates.
