Debt Consolidation: The Movie!


Check out the action-packed math behind debt consolidation!

There’s always that moment in action movies: the moment when the heroes realize that they have to work together to defeat the supervillain/terrorist/evil genius/British guy. This happens so much that it’s become a cliché.

But here’s the thing about clichés: they’re usually based in truth. People do have to work together to tackle big problems. It’s no different when it comes to tackling debt—combining your smaller debts together into one large debt can actually help you handle the load.

This is called debt consolidation. Taking out a single loan to pay off all your smaller debts can not only mean fewer monthly payments, it can mean you’re actually paying less per month.

Now, this is only true if you manage to secure a lower interest rate and/or a longer repayment term on your debt consolidation loan. Plus, unlike in the movies, getting your debts to team up comes with certain risks: A longer repayment term probably means you’ll end up paying more money over time.

So is debt consolidation worth the risk? To find out how debt consolidation really works, we have to look at the math.

Check out Table 1, depicting a typical debt load. There are four total debts—two credit cards and two loans—that total $24,000 in money owed. Each debt has its own monthly minimum payment, its own Annual Percentage Rate (APR), and its own repayment term.

Table 1: Typical Debt Load

ProductPrincipalAPRMonthly Min.TermTotal Interest
Credit Card #1$5,00025%$16648 months$2,958
Credit Card #2$7,00023%$19760 months$4,840
Personal Loan #1$4,00020%$14936 months$1,352
Personal Loan #2$8,00019%$23948 months$3,481
Total Principal Owed:$24,000
Total Monthly Payments:$751
Total Interest Paid:$12,631


If you made only the minimum monthly payments, it would take you a total of 60 months (5 years) to pay off these debts. Every month, you would be paying a total of $751, and over those 5 years you would paying a total of $12,631 in interest. No matter what loan you take out, you’ll always have to pay back the principal, while how much you’ll pay in interest will vary. The less you pay in interest, the less expensive the loan is overall.

Table 2 represents a debt consolidation loan.


Table 2: Consolidated Debt Load

ProductPrincipalAPRMonthly Min.TermTotal Interest
Consolidation Loan$24,00016%$47784 months$16,042


The total amount owed on the principal is the same: $24,000. But a lot of the other numbers are quite different. With this consolidation loan, you would only owe $477 per month—$274 less than you would owe on all those other debts. If you feel like you’re drowning in debt, that $274 could make a huge difference.

The lower monthly payment is because of the lower APR and longer repayment terms. With the lower APR, you’re getting charged a smaller percentage of the principal loan amount. With the longer repayment term, you’re paying a smaller percentage of the amount owed every month. You’re paying off the same amount overall, you’re just breaking it down into smaller chunks.

However, the downside associated with longer terms is that you will pay more overtime. Take another look at Table 2. You would pay $16,042 in interest on the debt consolidation loan, as opposed to only $12,631 in interest on all the smaller debts. That’s a difference of $3,411.00. Why is that?

Think about it like this: your loan is accruing interest every year, that’s what the APR measures. So if you repay your loan over seven years instead of five, your loan is accruing interest for an additional two years. This is why you end up spending more even though your monthly payments are less. Even if it’s a lower rate, the interest has much more time to add up.

Real life is not like the movies, there are no silver bullets, no magical spells, no neat and tidy “they lived happily ever after” kinds of endings. Every solution has its benefits, just like every solution has its costs. Is paying less per month and relieving that short-term burden worth paying more over the long run? If so, then debt consolidation might be the solution for you. You can learn more about consolidating debt in the article Debt Consolidation Loans – An OppLoans Q&A with Ann Logue, MBA, CFA.

And if you’re struggling with high-cost payday loans, a personal installment loan from OppLoans could be your consolidation solution. With longer terms (6 to 36 months), lower rates (70-125% less than other loans), and regularly-scheduled payments, you could use a personal installment loan from OppLoans to safely consolidate your payday debt. Our loans allow you to pay your debt off over time without busting your budget. To learn more, or to apply for a loan today, just check out our homepage,