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What is debt consolidation and when is it worth it?

Debt consolidation combines several loans into one monthly payment. See how it works, how the new payment is calculated, and why a lower payment is not always cheaper.

4 min readReviewed By Thorben Rasmus IdelReviewed by Nahar Geva

TL;DR

Debt consolidation combines several loans (a personal loan, a credit card, a car loan) into a single new loan with one monthly payment. The principal of the new loan is the sum of the outstanding balances, and the payment is worked out with the French system from the rate (TAN) and the term. Consolidating almost always lowers the payment, but it usually lengthens the term, and more time paying means more interest overall. Always compare by the TAEG (APR) and the total cost of the credit, not just the payment.

What is debt consolidation?

Debt consolidation (or "combining loans") means replacing several loans (a personal loan, a credit card, a car loan) with a single new loan and one monthly payment1. The bank settles the old debts and finances the sum of the balances you still owed.

The usual goal is to lower the total payment and simplify your finances: instead of several payments on different dates and at different banks, you have just one. To do that, the term is normally lengthened, and that is where the catch is, as we will see.

How the new payment is calculated

The principal of the new loan is the sum of the outstanding balances of the loans you combine. The payment is constant and follows the French amortisation system: each month, part of the payment covers the interest on the balance still owed and the rest repays capital. The formula is:

payment = principal × i / (1 − (1 + i)^−n)

where i is the monthly rate (the TAN divided by 12) and n is the number of months in the new term. The monthly saving is the sum of your current payments minus the new payment. It is the same maths as the personal loan calculator: consolidating is, in effect, taking out a personal loan for the total you still owe.

The catch: a longer term, more interest

Lowering the payment almost always means lengthening the term, and more time paying means more interest overall. A lower payment today can, after several years, cost more than you would pay by keeping your current loans. So when you decide, look at two numbers, not just one:

  • the monthly payment (the immediate relief in your budget), and
  • the total cost of the credit (the interest plus any fees over the whole term).

Always compare offers by the TAEG (the APR), which bundles the interest and every charge and measures the real cost of the credit, never just by the TAN or the payment. To understand in detail what the TAEG includes, see what the TAEG is.

How much does it cost? (worked example)

Imagine three debts:

  • a credit card with €3,000 owed and €150/month,
  • a personal loan with €8,000 and €250/month,
  • a car loan with €5,000 and €180/month.

That is €16,000 owed in total and €580/month. Consolidating the €16,000 into a new loan over 72 months (6 years) at an 8.5% TAN:

  • The new payment is about €284.45/month, a saving of about €295.55 a month.
  • The TAEG would be 8.84% (the TAN compounded monthly).
  • Over the 6 years you would pay about €20,481, of which about €4,481 is interest.

The payment falls sharply, but notice that the longer term leaves you paying interest for longer. Run the numbers with your own figures in the debt consolidation calculator, which shows the new payment, the monthly saving, the TAEG and the total cost.

What to check before consolidating

Before going ahead, keep in mind that:

  • Closing each old loan can carry an early-repayment commission, usually 0.5% or 0.25% of the outstanding capital, depending on the time left2. Add that cost.
  • The new loan can have an arrangement fee, insurance and stamp duty, which enter the real TAEG the bank shows in its standardised information sheet (FINE).
  • Banco de Portugal publishes, every quarter, the maximum rates (TAEG) for each type of consumer credit1. An offer above that limit is illegal.

Consolidation is a useful tool when the total payment strains your budget and the goal is monthly breathing room, or when you can get a lower rate than the average of your current loans. Before you decide, check that the payment fits comfortably in your budget and always compare by the TAEG and the total cost, not just the size of the payment.

Common mistakes

  • Looking only at the payment

    A lower payment always looks better, but it can hide more years of paying and more interest overall. Look at the total cost of the new credit, not just the monthly amount.

  • Ignoring the cost of settling the old loans

    Closing each loan before its end can carry an early-repayment commission (usually 0.5% or 0.25% of the capital). Add that cost before deciding whether consolidation is worth it.

  • Comparing offers by the TAN

    The TAN excludes fees and stamp duty. Always compare the TAEG, which reflects the real cost of the consolidated loan.

Frequently asked questions

What is debt consolidation?
It means combining several debts (a personal loan, a credit card, a car loan) into a single new loan with one monthly payment. The bank settles the old debts and finances the sum of the outstanding balances, usually over a longer term, which lowers the total payment.
How is the new payment calculated when you consolidate loans?
The principal of the new loan is the sum of the outstanding balances. The payment is given by the amortisation (French-system) formula: payment = principal × i / (1 − (1 + i)^−n), where i is the monthly rate (the TAN ÷ 12) and n is the number of months. The monthly saving is the sum of your current payments minus the new payment.
Is consolidating loans cheaper?
It almost always lowers the monthly payment, but not always the total cost. Because consolidation usually lengthens the term, you pay interest for longer and can pay more in total, even at a lower rate. Always look at the total cost of the credit and compare by the TAEG.
Are there costs to combine the loans?
Yes. Closing each old loan can carry an early-repayment commission (usually 0.5% or 0.25% of the outstanding capital, depending on the time left), and the new loan can have an arrangement fee, insurance and stamp duty. These charges enter the real TAEG a bank shows and should be added before deciding.
When is consolidation worth it?
It is usually worth it when the current total payment strains your budget and the goal is monthly breathing room, or when you can get a lower rate than the average of your current loans. It is not worth it if the only effect is to stretch the term a lot and pay much more interest. Run the numbers in the debt consolidation calculator.

Related reading & calculators

Sources

  1. 1.Consumer credit: TAN, TAEG and commissions — Banco de Portugal, Bank Customer Website · retrieved 27 Jun 2026
  2. 2.Decree-Law 133/2009, consumer credit regime — Diário da República · retrieved 27 Jun 2026

Author / Reviewed by

Author

Thorben Rasmus Idel

Co-founder & writer

Co-founder of Calculadora Capital and the writer behind the methodology on every calculator and article. An entrepreneur and active investor, Thorben founded Idel Versandhandel GmbH, an international trading company operating across 16 countries, and invests across stocks, ETFs and cryptocurrency. He writes the methodology and verifies the math behind each page, drawing on hands-on business and investing experience to keep the tools and explanations grounded in how money, markets and taxes actually work for everyday people in Portugal.

Reviewed by

Nahar Geva

Co-founder & reviewer

Co-founder of Calculadora Capital and the independent reviewer behind every calculator and article. An entrepreneur and active investor, Nahar brings a data- and product-driven mindset together with hands-on experience in the markets — investing across stocks and ETFs as well as cryptocurrency and other digital assets, alongside broader personal finance and real estate. On each page Nahar reviews the methodology and double-checks the math and figures, pressure-testing how the tools and explanations hold up against the way money, markets and taxes actually work for everyday investors.

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