Debt Consolidation Guide: APR Arbitrage & Interest Payoff Formulas
Complete financial guide to debt consolidation: calculating weighted average APR, origination fee breakevens, monthly cash flow relief, and accelerating debt freedom.
Debt consolidation combines multiple high-interest credit card balances and unsecured loans into a single fixed-rate personal loan with a lower Annual Percentage Rate (APR). By replacing revolving credit cards charging 20% to 28% interest with an installment loan at 9% to 14%, borrowers reduce monthly payments and redirect hundreds of dollars per month away from compounding bank interest directly toward principal reduction.
Model Your Debt Consolidation Savings & Acceleration
Input your existing credit card balances, APRs, and monthly payments to evaluate interest savings from a consolidated loan.
1. The Mathematics of APR Arbitrage Credit card companies structure minimum monthly payments (often 1% of balance plus accrued interest) so that debt takes 15 to 25 years to amortize, compounding thousands in finance charges.
Consolidation executes an APR Arbitrage: $$\mathbf{\text{Weighted APR}} = (\sum (\text{Balance}_i \times \text{APR}_i))/(\text{Total Debt Balance)}$$
Replacing a weighted 23.5% credit card portfolio with a 10.5% fixed installment loan lowers monthly interest charges by more than 50% overnight!
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