Know what you’ll pay with each type of consolidation.
Debt consolidation costs vary depending on which option you use to consolidate. It’s important to understand how costs for the various options can apply, so you can decide which option works best for your situation.
Debt consolidation loan costs
- Fees: Loan origination fees (1-5% of the amount borrowed)
- APR: Recommended 10% APR or lower*
*Personal loan interest rates vary based on your credit score. With a good or excellent credit score, you can qualify for an interest rate of less than 10%, which is recommended.
While you may be able to qualify for a loan at a higher interest rate, it will not provide as much cost savings; it will also result in higher payments. You want the rate to be significantly lower than the rates on your credit cards for the loan to be effective.
Balance transfer costs
Fees: 3-5% of each balance transferred
APR: 0% APR for 6-18 months*
*With good or excellent credit, you can qualify for a 0% APR introductory rate for a short time after you open the account. After this period the rate will return to normal. You want to pay off the debt within the 0% APR period for a balance transfer to be beneficial.
Home equity loan costs
- Closing Costs: 2-5% of the loan amount, including application and attorney fees, proof property taxes, credit report fee
- Appraisal Fee: $300-$400 average
- Title Search: $75-$100 average
- APR: 4-7%*
*APR is lower on home equity loans than unsecured personal consolidation loans because you use your home as collateral.
However, this type of loan increases your risk. If you default on a home equity loan, you risk the lender starting foreclosure actions against you.
A case study in debt consolidation costs
Let’s say you owe $25,000 across multiple credit cards at an average APR of 20%. On a standard 3% minimum payment schedule, it would take over 300 payments to eliminate the full balance. You’d pay over $30,000 in interest charges for a total cost of over $55,000 to get out of debt ($25,000 principal plus $30,000 in interest). Your starting minimum payments would be $750.
So, how do the various debt consolidation options compare? And how do their costs compare to the cost savings they offer?
Debt consolidation loan
$25,000 principal + 3% loan orientation fee = $25,750 borrowed
At 10% APR:
- If you choose a short term of 36 payments, the monthly payments would be higher at just over $830. The total interest would be around $4,150, for a total cost of around $29,150.
- If you choose a long term for 60 payments, the monthly payments would be lower at around $550. The total interest would be roughly $7,000 for a total cost of $32,000
The balance transfer fees would be around $1,000, meaning you would need to pay off $26,000 in total. Assuming you qualified for an 18-month 0% APR period, you would need to make payments of almost $1,500 per month to pay off the balance in full before the 0% APR period ended.
For this reason, balance transfers tend to have limited success, because the payments are generally much higher than what you pay on all your accounts individually.
Home equity loan
Closing costs and other fees would be around $1,250 if you only borrow what you need to pay off your credit cards (which is not recommended). With a five-year term (anything longer is not recommended) you will have monthly payments just over $500. The total interest charges would be just over $4,200, which means you would have a total cost of $30,700.