## 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 rate of interest to low bearing rate 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.

#### 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

### 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

**PV = L*[1-(1+i)**

^{-n}/r]**Step #2 – **Next would be to find out the new installment amount based on existing outstanding balances with a lower rate of interest using below formula

**New Loan Installment = [∑PV*R*(1+R)^N]/[(1+R)^N-1**

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

**nPVA =**

*In*[(1-PV(R)/L’)^{-1}]/*In*(1+R)Wherein,

- PV is the present value of Outstanding Balance
- ∑PV is the sum of the present value of outstanding balances
- L is the existing Payment
- L’ is the new Payment
- i is the old rate of interest
- R is the new rate of interest
- n is the frequency of payments
- N is the remaining number of payments
- nPVA is the number of periodical payments

### Debt Consolidation Loan Calculator Examples

#### Example #1

Suppose that Mr. X has two debt outstanding: one is for $45,987 and another one is for $15,788. The rate of interest was quite high and hence Mr. X decided to convert them into a consolidated loan for 4 years with a rate of interest 9.75%.

Based on given information you are required to calculate 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 total outstanding debt would be $61,775

- Rate of interest would be 9.75%/12 which is 0.81%

**New Loan Installment = [∑PV x R x (1+R)^N]/[(1+R)^N-1**

= [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 then he needs to pay $1,559.37 on monthly basis for 4 years.

#### Example #2

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

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

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

**Solution:**

We need to calculate the present value of the current outstanding Debt balance which can be calculated per below formula:

#### Student Loan

- Rate of interest applicable on monthly basis = 11/12 = 0.92%

- The remaining period is 7 years which is 84 months.

**PV = L*[1-(1+i)**

^{-n}/r]= $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 5 years which is 60 months.

**PV = L*[1-(1+i)**

^{-n}/r]= $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 by using the below formula, taking a new interest rate which is (9%/12) 0.75%, tenure of the longest loan outstanding which is 84 months.

**New Loan Installment = [∑PV x R x (1+R)^N]/[(1+R)^N-1**

= [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 consolidated loan

- Now, we shall calculate within what span of time will the consolidated loan be cleared off

**nPVA =**

*In*[(1-PV(i)/L’)^{-1}]/*In*(1+i)= *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 5 years and 6 months with a new installment.

### Advantages

- The main benefit is the loan will be paid off sooner and this shall boost up the credit score of the borrower.
- Once this debt consolidation is done, the collection agencies would stop following up.
- If one converts the unsecured debt into secured consolidated debt, there might be tax rebates available.
- Debt consolidation can result in lower interest rate tax and thus savings in interest outgo and also a reduction in tenure of the loan.

### Disadvantages

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

### Important Points to be noted

Following points needs to be noted while consolidating the debt

- The borrower should have multiple debts outstanding
- Either Bank would have offered to the borrower to consolidate the loans at a lower rate due to his good credit score or borrower would wish to consolidate if he is defaulting on multiple loans.
- There could be terms such as minimum outstanding loan amount should be $100,000 in certain cases in order to consolidate or minimum tenure remaining should be 3 or more years.

**Conclusion**

Hence, whether its secured loan or unsecured loan, the moral of the story is that either the borrower can consolidate those loans by paying less interest and pay it earlier or consolidate loan and pay it more than earlier due to liquidity crunches. These loans that are merge don’t get deleted but are simply transfer.

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