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Loan Consolidation Calculator & Formula
Loan Consolidation Calculator
The Loan Consolidation Calculator helps you determine the potential savings and the new monthly payment if you consolidate multiple loans into a single loan. Loan consolidation can simplify your finances, lower your monthly payment, or reduce your total interest payments. Use this tool to assess whether consolidation is the right choice for you.
Loan Consolidation Formula
The formula for calculating the new monthly payment after consolidation is:
- L: Consolidated Loan Amount (sum of all loans)
- r: Annual Interest Rate (in decimal form)
- n: Total Number of Monthly Payments
This formula calculates the fixed monthly payment for the consolidated loan based on its total amount, interest rate, and term.
Real-Life Example
Imagine a borrower consolidates three loans:
- Loan 1: $10,000 at 5% for 5 years
- Loan 2: $7,500 at 6% for 3 years
- Loan 3: $12,500 at 4% for 7 years
Step 1: Calculate the total consolidated loan amount: $10,000 + $7,500 + $12,500 = $30,000.
Step 2: Assume the consolidated loan has a new interest rate of 5% and a term of 6 years. Using the formula:
New Monthly Payment: Calculate using the provided inputs, resulting in approximately $483.15 per month.
This borrower simplifies three payments into one, reduces their total interest, and lowers their monthly payment.
Benchmark Indicators
Here are typical scenarios for loan consolidation:
High Savings: Consolidating loans with significantly higher rates into a lower-rate loan.
Moderate Savings: Consolidating loans with similar rates for simplicity, but with marginal savings.
Low or No Savings: Consolidating loans with no rate improvement, possibly increasing the total interest paid.
Frequently Asked Questions
What is loan consolidation?
Loan consolidation combines multiple debts into one loan, often with a single monthly payment and a new interest rate or term.
How does loan consolidation save money?
Consolidation can save money if the new loan has a lower interest rate or if you extend the term to reduce monthly payments.
What types of loans can be consolidated?
Most loans, including credit card debt, personal loans, and student loans, can be consolidated. However, eligibility and terms vary by lender.
Are there risks to loan consolidation?
Yes, risks include extending the loan term, which may increase total interest paid, or consolidating at a higher interest rate than individual loans.
How do I qualify for loan consolidation?
Qualification depends on factors like your credit score, income, and existing debt. Lenders may have specific requirements for consolidating loans.
