Loans & debt
Debt consolidation: Definition, Formula and Example
Debt consolidation combines repayment of multiple debts into a new loan or credit arrangement; it does not itself reduce the amount owed.
Scope: General financial concept; examples are hypothetical.
Other names and related labels: Consolidation loan; Combining debt payments.
How it works
A lower rate or a simpler payment can help in some cases, but fees and a longer term can increase total cost. Balance-transfer offers may have promotional rates and transfer fees. Securing previously unsecured debt against a home adds collateral risk.
New financed balance = debts paid off + financed fees; compare total future payments and upfront costs over a stated horizon
Avoid comparing monthly payment alone. Identify which fees are financed, paid separately or withheld from proceeds.
$5,000 of debt with a financed 3% fee
Combine $2,000 and $3,000 of balances.
- Debt total: $2,000 + $3,000 = $5,000.
- Fee: $5,000 × 3% = $150.
- New principal with financed fee: $5,000 + $150 = $5,150.
The new loan starts at $5,150, so consolidation has not erased any debt.
A hypothetical financed fee; interest and repayment term must be evaluated separately.
The worked example uses the assumptions above. Related tools may model a different scope; check their descriptions before comparing results.
A lower monthly bill can still cost more
Extending repayment can offset a lower interest rate. New spending can rebuild old balances. Debt settlement, credit counseling and consolidation are different services with different consequences.
Explore with a calculator
- Debt Consolidation Calculator
Compare the tool’s modeled debts, fees and consolidation terms.
Sources and checks
Definition and example arithmetic checked . Sources explain the concepts; numerical examples use the assumptions stated above.
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