Should You Consolidate Your Debt?
If you’re juggling multiple loans or credit card balances, you may be considering a debt consolidation loan. This type of loan combines several debts into one, usually through a mortgage refinance, home equity loan, or line of credit. The goal is often to reduce your interest costs and simplify payments. But before you decide, it’s smart to dig deeper. Here are three key questions that can help you determine if debt consolidation is the right financial move.
- What’s My Total Annual Interest on Each Debt?
The first step is to understand the true cost of your debt. To do this, calculate the annual interest expense on each loan or credit card balance:
👉 Formula: Interest Rate × Loan Balance = Annual Interest Expense
Once you do this for every debt, add them up. The final number shows how much interest you’re paying each year. This helps you see if consolidation could meaningfully lower that cost.
- What’s My “Blended Interest Rate” Before and After Consolidation?
Your blended interest rate is the weighted average of all your debts combined. Think of it as the big-picture cost of your borrowing.
👉 Formula: Total Interest Paid ÷ Total Loan Balances = Blended Interest Rate
Compare this number before and after consolidation. If the new loan lowers your blended rate, consolidation could save you money. But if the new rate is higher, you may actually end up paying more over time—even if your monthly payment looks smaller.
- What Will I Do With the Extra Monthly Cash Flow?
Many people choose debt consolidation to lower their monthly payments. While this can ease your budget, there’s an important catch. For example, rolling a short-term car loan into a 30-year mortgage spreads that cost over decades. While it may reduce today’s payment, you could be paying more in the long run.
The key question is: How will you use the freed-up cash flow?
- Will you invest it wisely?
- Will you build up savings?
- Or will it get lost in everyday spending?
Making the right choice here is often the difference between true financial progress and simply shifting debt around.
Final Thoughts
Debt consolidation can be a powerful tool when used correctly. By calculating your annual interest, comparing blended rates, and planning for your new cash flow, you’ll be better equipped to decide if it’s the right move. Remember, the loan itself isn’t the solution—how you manage it determines your financial success.