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I currently have several different credit accounts with balances that need to be paid off, and I am considering consolidating these accounts into a single loan account.

These accounts each have different balances and APRs (all fixed APRs), and so as a result I am paying a certain amount of interest on each, which comes to some total interest.

In order to find a loan that would make me better off, I was wondering whether there was a way - some mathematical formula - to aggregate the balances and APRs on these accounts such that I could find a maximum APR, the interest payments on which would not exceed the total interest I am currently paying on all my existing accounts.

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You could calculate a simple blended rate by multiplying for each debt the interest rate by the principal to give you annual interest. Then divide the total of all those annual interest calculations by the total outstanding debt.

 Principal  Rate    Annual Interest
 10,000     5%      500 
 15,000     7%      1,050 
 20,000     6%      1,200 
 ---------          ------
 45,000             2,750

 2,750/45,000 = 6.11%

So those 3 loans are equivalent to one 45,000 loan at 6.11% interest.

However, in consolidating it doesn't make sense to include any debts that have a lower interest rate than the consolidation rate. Consolidate only what will save you money, and don't forget to factor in any fees into the effective interest rate.

  • But. Say that consolidating the full amount frees up monthly cash to deposit to s matched 401(k). Even payer a higher rate on all of it at a longer payoff would likely put OP ahead. Of course, given the constraints of the question, you are 100% correct. – JoeTaxpayer Jul 22 '18 at 13:40

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