Do Debt Consolidation Loans Reduce the Total Amount of Interest Paid?

Debt consolidation loans are a great way of reducing monthly repayments, simplifying your finances or even borrowing extra money for a new car, home improvements or holiday abroad. One of the most common reasons cited for consolidating debt with a secured loan is a low APR and an ability to extend the borrowing term.

How a Debt Consolidation Loan Affects Monthly Payments

Example 1: The 5 year term at 12.5% APR

A loan for $20,000 over 5 years at 12.5% APR will result in monthly repayments of $443.24.

Example 2: The 10 year term at 7.4% APR

A loan for $20,000 over 10 years at 7.4% APR may reduce monthly repayments to $233.87.

The lower rate of APR combined with the extended term mean that monthly repayments are reduced from $443.24 to $233.87. This represents a saving of $209.37.

Cumulative Interest Payments

Consolidating debt with a secured loan can help to reduce the cumulative amount of interest paid. However, extending the term of debt will increase the total amount paid. This can even be the case if the APR on the loan is a lot lower.

Example 1: The 5 year term at 12.5% APR

A loan for $20,000 over 5 years at 12.5% APR will mean that $25,594.17 is paid over the full duration.

Example 2: The 10 year term at 7.4% APR

A loan for $20,000 over 10 years at 7.4% APR will mean that a total of $28,064.69 is repaid.

Despite the substantially lower rate of APR, the borrower will pay $2,470.52 more due to the longer duration of the loan.

Extending the term reduces monthly repayments. This helps to free-up money for other essential bills. However, paying over a longer period of time will increase the total amount paid. When consolidating debt, try to let the lower rate of APR reduce payments and not the longer repayment period.

Relevant Articles:

Pros and Cons of Debt Consolidation Loans
How an Unsecured Loan for Debt Consolidation Will Help You
Debt Consolidation Loan Vs Debt Solution

Disclaimer: This article in no way attempts to provide legal, financial or tax advice. One should consult a licensed attorney, tax advisor, or other qualified financial professional before proceeding.