The offer is two changes wearing one number
A debt consolidation loan takes several card balances at, say, 25% and replaces them with a single instalment loan at 15%. That is unambiguously good: cheaper money is cheaper money. At the same time it replaces a debt you were going to clear in three years with one scheduled over five. That is unambiguously expensive, because you pay interest for two extra years.
The two effects run in opposite directions and the marketing only ever quotes their combined result, which is a smaller monthly payment. A smaller payment is not a saving. It is the sum of a genuine saving and a genuine cost, presented as though the cost were not there.
The only way to know which effect is larger is to price them separately, which is exactly what the payoff route comparison does in Plate II. The method is simple enough to do by hand: run the same consolidation loan twice, once at the payment the lender requires and once at the payment you are making today. The difference between those two totals is the cost of the longer term, and nothing else.
A worked example
$22,000 across five cards. Minimum payments total $574, and you are putting an extra $250 a month against them: a budget of $824. On the avalanche route — highest rate first — that clears in 39 months for $9,644 of interest.
The offer is 14.99% over 60 months with a 5% origination fee. The contractual payment is $550.80, which is $273 a month less than you pay now. Over sixty months that is $33,048 handed over, $9,890 of it interest.
Take the same loan and keep paying $824. It clears in 35 months, with $5,545 of interest — roughly $4,345 less, on identical borrowing at an identical rate. That $4,345 is the price of the longer term. It is not a fee, it is not a penalty, and nobody will ever mention it, because from the lender's point of view it is the product.
Note what this means. The consolidation loan is not the problem. The payment reduction is the problem, and it is optional. If you consolidate and keep paying what you pay now, you capture the rate saving and skip the term extension entirely. Almost nobody does, because the reason people consolidate is that the payment is unmanageable — which is a real reason, and worth being honest with yourself about.
The origination fee is not where you think it is
Personal lenders typically charge an origination fee of 1% to 8%, and the fee is not billed to you. It is deducted from the proceeds. Borrow $22,000 with a 5% fee and $20,900 arrives — which does not clear your cards.
To actually clear $22,000 you have to borrow $22,000 ÷ 0.95 = $23,157.89. The extra $1,157.89 is the fee, and you pay interest on it for the whole term. Any calculator that defaults the fee to zero is understating a five-year 15% loan by more than the fee itself.
Check the loan agreement for the "amount financed" against the "amount disbursed". If they differ, the difference is the fee, and it belongs in your comparison.
How to read an offer letter
- Find the APR, not the interest rate. On a personal loan the APR is legally required to include the origination fee, which is why the APR is usually higher than the quoted rate. If a letter quotes only a rate, the fee is hiding.
- Find the term. Then compare it honestly with how long your current debts would actually take at the payment you make now — not at the minimums.
- Find the total of payments. Federal Truth in Lending disclosures require it. It is the single most useful figure on the page and the one nobody reads.
- Check for prepayment terms. Most personal loans have no prepayment penalty, which means the term is a ceiling rather than a schedule. That is what makes "consolidate but keep paying the old amount" possible.
- Check whether the lender pays your creditors directly. Some do; it removes the temptation to use the loan for something else and to leave the cards open and used.
When consolidation genuinely wins
Often enough that dismissing it is as lazy as accepting it. It wins when the rate gap is wide — a 28% store card against a 12% credit-union loan is worth having — when the fee is small or zero, which credit unions frequently manage, and when the term is no longer than the time you would have taken anyway.
It also wins for reasons the arithmetic does not capture. One payment on one date is easier to keep on time than five, and a fixed instalment loan cannot be spent again the way a cleared credit card can. If the honest reason your balances grew is that the cards were available, converting them into a loan you cannot redraw has real value.
What it never fixes is the spending that created the balances. Consolidating cards and then running them back up is the most common way this goes badly wrong, and it leaves you with the original debt plus a loan.
The routes people forget to compare it against
A consolidation offer arrives with no competitors in the envelope. Before accepting it, price it against these:
- Avalanche on what you already have. No fee, no application, no new account. Often cheaper than a consolidation loan taken at its contractual payment.
- A balance transfer, if the total is small enough to clear inside the promotional window. A 4% fee for 18 months at 0% beats almost any instalment rate — but only if the balance is gone before the cliff.
- Your issuer's hardship programme. Most large issuers run one. Rates drop to somewhere between 0% and 6% for six to twelve months, usually with the card frozen. It is free, it does not require an application to anyone new, and comparison sites never mention it because no commission is paid.
- A non-profit debt management plan through an NFCC or FCAA accredited agency, which negotiates concessions across all your cards at once for a modest monthly fee. This is not debt settlement and should not be confused with it.
None of those pay anybody a commission, which is precisely why you have to go looking for them.
The one sentence to take away
A lower monthly payment on the same debt is a rescheduling, not a saving, and the only figure that settles a consolidation offer is the total of payments over the term — with the origination fee added back in, and compared against what you would have paid by simply continuing.
General guidance on unsecured consumer debt in the United States. Loan terms, fees and programme availability vary by lender and by state, and your own agreement governs. Not financial, credit or debt advice.