Debt Consolidation Loans: Why a Lower Payment Can Cost More

A debt consolidation loan saves money only if the new rate is lower and the term is not stretched too far. Borrowing $20,000 at 12% costs $3,914.30 in interest over 3 years but $9,656.59 over 7 years. The 7-year payment is $353.05 instead of $664.29, which is why the longer loan is easy to say yes to.

Today's Rates

In the Federal Reserve's latest data (first quarter of 2026), credit card accounts that were charged interest averaged a 22.15% APR. Commercial banks' 24-month personal loans averaged 11.86%. Your offer depends on your credit, income and the lender, so treat these as benchmarks, not quotes.

Worked Example: $20,000 of Card Debt

Start with $20,000 on credit cards at 22.15%. The monthly payment on any fixed-rate loan uses the same formula:

Two things stand out. The 3-year loan at 12% saves $12,737.31 compared with paying $500 a month on the cards. But the 7-year loan costs more interest ($9,656.59) than paying the cards at $664.29 a month ($9,468.54), even though its rate is about half the card rate. The longer term uses up the rate savings.

Origination Fees Add to the Cost

Many personal loans charge an origination fee, often taken from the loan amount or added to it. With a 3% fee added to the balance, you borrow $20,600:

• 3 years: $684.21 a month; you repay $24,631.73, or $4,631.73 more than the $20,000 you owed.
• 7 years: $363.65 a month; you repay $30,546.29, or $10,546.29 more.

Compare offers by APR, which includes fees, and by the total you will repay, not just the payment. A lender that quotes a low rate with a high fee can cost more than one with a slightly higher rate and no fee. If the fee is taken out of the loan instead, you receive less than you borrow and may need a larger loan to clear the cards.

The Bigger Risk: New Card Balances

The CFPB warns that taking on new debt to pay off old debt may just push the problem forward unless spending changes. After consolidation, the cards show a zero balance and full credit limits. If new charges build up, you end up paying the loan and new card debt at the same time.

The CFPB also flags promotional rates that jump after the intro period, balance transfer fees, the risk of using home equity (your house secures the debt) and "debt relief" companies that charge up-front fees.

Why Paying Only a Little Is So Costly

Staying on the cards is worst when the payment barely covers interest. At 22.15%, the $20,000 balance charges about $369 of interest in the first month ($20,000 × 0.2215 ÷ 12). Paying $400 a month takes 141 months, almost 12 years, and costs $36,049.86 in interest.

Paying the cards off in 3 years without a loan takes $765.36 a month and costs $7,553.03 in interest. That is the real comparison for the 3-year loan at 12%: the loan's payment is about $100 lower and it saves $3,638.73 in interest.

When Consolidation Tends to Pay Off

• Lower cost, not just a lower rate. The new APR, including fees, is clearly below the average rate on your current debts.
• A short term. You choose the shortest term you can afford, not the lowest payment offered.
• A plan for the cards. You have a way to stop new balances, such as removing saved cards or lowering limits.

Before You Sign

• Get the total amount you will repay in writing, including the origination fee.
• Ask whether there is a penalty for paying the loan off early.
• Check whether the rate is fixed or can change.
• Set up the loan to pay each card directly, if the lender offers it, so the money cannot be spent elsewhere.

What This Doesn't Cover

This guide does not cover 0% balance transfer cards, the effect on your credit score, debt management plans or bankruptcy. Card rates in the example are held fixed, though many are variable. If payments already feel out of reach, a nonprofit credit counselor can review your options before you take on a new loan.

Sources: Federal Reserve G.19 Consumer Credit (card and personal loan rates); CFPB, What do I need to know about consolidating my credit card debt?