Debt Consolidation Calculator How To Consolidate Your Loans

Debt Consolidation Calculator

Debt consolidation is when the person who has borrowed money would like to merge its existing multiple loans that are bearing high rates of interest to low bearing rates of interest one which would be a consolidated loan and further, the person who has borrowed money could also apply their savings which are made monthly in repayment and hence will be able to save interest and will help reduce the debt burden. Here the debt consolidation calculator will make all such calculations easy.

How to Calculate using the Debt Consolidation Loan Calculator?

Step #1 – First, find out the present value of the outstanding balances on the multiple loans

Debt Consolidation Calculator

[∑PV x R x (1+R)^N]/[(1+R)^N-1]

∑PV is the sum of present value of outstanding Balances
R is the new rate of interest
N is the remaining number of payments

Step #2 – Next would be to find out the new installment amount based on existing outstanding balances with a lower rate of interest using the below formula

Step #3 – Now calculate the period within which the debt can be paid off

Wherein,

PV is the present value of Outstanding Balance∑PV is the sum of the present value of outstanding balancesL is the existing PaymentL’ is the new Paymenti is the old rate of interestR is the new rate of interestn is the frequency of paymentsN is the remaining number of paymentsnPVA is the number of periodical payments

Debt Consolidation Loan Calculator Examples

Example #1

Suppose that Mr. X has two debts outstanding: one is for $45,987, and another one is for $15,788. The interest rate was quite high, so Mr. X decided to convert them into a consolidated loan for four years with a rate of interest of 9.75%.

Based on the given information, you are required to calculate the new installment amount of the consolidated debt

Solution:

We have two loans outstanding one is for $45,987, and the second one is $15,788, and the total outstanding debt would be $61,775
The rate of interest would be 9.75%/12, which is 0.81%

= [61,775 x 0.81% x (1+0.81%)^48] / [(1+0.81%)^48-1]

= $1,559.37

Hence, if Mr. X wishes to consolidate the loan, he must pay $1,559.37 monthly for four years.

Example #2

Sunita Williams has taken two loans and the details of which are given below:

Sunita has recently received an offer from the Bank to merge the debt into one, with the duration being the equivalent of the longest outstanding tenure. The current monthly installment she is paying is $619.88 and $913.07, respectively. The rate of interest offered is 9%.

Based on the given information, you must calculate the new installment amount of the consolidated loan and the tenure within which the debt can pay off fully.

We need to calculate the present valuePresent ValuePresent Value (PV) is the today’s value of money you expect to get from future income. It is computed as the sum of future investment returns discounted at a certain rate of return expectation.read more of the current outstanding Debt balance, which can be calculated per the below formula:

Student Loan

Rate of interest applicable on monthly basis = 11/12 = 0.92%
The remaining period is seven years, which is 84 months.

= $619.88*[1-(1+0.92%)-84/0.92%]

= $36,202.50

Auto Loan

Rate of interest applicable on monthly basis = 10/12 = 0.83%
The remaining period is five years which is 60 months.

= $913.07 x [1 – (1+0.83%)-60 / 0.83%]

= $42,973.75

Consolidated outstanding loan

= $36,202.50 + $42,973.75

= $79,176.25

We will now calculate the new installment amount using the formula below, taking a new interest rate, which is (9%/12) 0.75%, tenure of the longest loan outstanding is 84 months.

= [79,176.25 x 0.75% x (1+0.75%)^84] / [(1+0.75%)^84-1]

= $1,532.94

Tenure within which to pay off a consolidated loan

Now, we shall calculate within what period will the consolidated loan be cleared off

= In [{(1-79,176.25*(0.75%)/1,532.94}-1]/In(1+0.75%)

= 65.58 months

Hence, the debt can be cleared off within five and six months with a new installment.

Advantages

The main benefit is that the loan will be paid off sooner, which shall boost the borrower’s credit score.Once this debt consolidation is done, the collection agenciesCollection AgenciesA collection agency refers to a firm engaged in the recovery of the default loans or dues from the borrowers on behalf of the lenders or creditors. A loan provider or creditor outsources its debt-collection function to such a third party to reduce bad debts.read more will stop following up.If one converts the unsecured debt into secured consolidated debt, tax rebatesRebatesA rebate is a cashback to the customers against the purchase as a completing transaction incentive. Rebates are offered after the sale. Thus, it is a form of marketing strategy provided to the client to facilitate future transactions.read more might be available.Debt consolidationDebt ConsolidationDebt consolidation is a process which streamline several loans into a single one to receive the benefit of a lower interest rate. The reduced periodic payment leads to a reduction in liability.read more can result in lower interest rate tax and thus savings in interest outgo and a reduction in loan tenure.

Disadvantages

There could be a modest impact on credit score due to the renegotiation of multiple loans into one consolidation loan, as that would reflect the inability to repay the loans.Due to liquidity crunches, the debt is consolidated, which can be issued at a higher interest rate than the individual one. And hence the loan repaid at lower interest would shift to the higher-paying interest rate.

Important Points to be noted

The following points need to be noted while consolidating the debt

The borrower should have multiple debts outstandingEither Bank would have offered to the borrower to consolidate the loans at a lower rate due to his good credit score, or the borrower would wish to consolidate if he defaults on multiple loans.There could be terms such as minimum outstanding loan amount should be $100,000 in certain cases to consolidate or minimum tenure remaining should be three or more years.

Conclusion

Hence, whether it’s a secured loanSecured LoanSecured loans refer to the type of loans approved and received against a guarantee or collateral. If they fail to do so, the lending institution acquires the collateral to compensate for the amount that the borrowers were allowed.read more or unsecured loanUnsecured LoanAn unsecured loan is a loan extended without the need for any collateral. It is supported by a borrower’s strong creditworthiness and economic stabilityread more, the moral of the story is that either the borrower can consolidate those loans by paying less interest and pay it earlier or consolidate the loan and pay it more than earlier due to liquidity crunches. These loans that are merged don’t get deleted but are transferred.