Payday Loan Consolidation: What It Is and How It Works

Payday loans are marketed as a bridge between paychecks, but they come with high fees that translate into ultra-high annual percentage rates, or APRs. This can create an endless cycle of borrowing and repaying, making it difficult to get rid of.

However, debt relief is available. Payday loan consolidation allows you to get a loan with a lower average interest rate that you can pay off over a longer period of time, making them much more affordable. However, to be fully effective, you should avoid borrowing during the life of the loan.

How Payday Loan Consolidation Can Help

Payday loans are a difficult type of debt to pay off because borrowers can get into a cycle and have to take out a new loan to cover the costs the first time. More than 80 percent of payday loans are converted into a new loan because the borrower couldn’t pay the bill on time, according to the Consumer Financial Protection Bureau.

And it’s not just the quick repayment timeline. According to the Consumer Financial Protection Bureau, a two-week payday loan with a $15 fee for every $100 borrowed is equivalent to an APR of almost 400 percent.

A debt consolidation loan has a much lower APR. There is a range of payday loan consolidation options with annual interest rates of up to 36 percent, even for borrowers with bad credit. The drastic reduction in interest rates means you can save a fortune in interest and fees. You just need to know where to look.

How payday loan debt consolidation works

With a debt consolidation loan, you take out a loan with a lower interest rate and use the money to pay off your high-interest payday loan. You then pay back the debt consolidation loan over time.

The interest rate on a debt consolidation loan should be much lower, and you will pay it off over a longer period of time, usually 12 to 84 months. This makes the monthly payments much more manageable. And it can potentially save you money on interest and fees, although that’s not guaranteed. The payday loan consolidation process follows a few basic steps.

• Shop around for a lender that offers debt consolidation loans.
• Sign up for prequalification with lenders, which will not affect your credit score.
• Once you have chosen a lender, complete the complete application.
• If approved, the lender will present you with a loan agreement.
• Confirm that you can afford the monthly payment and other repayment terms.

Benefits of a payday loan consolidation

If you need help making loan payments, a consolidation loan can help you get your finances back on track. Debt consolidation loans typically offer:

• Lower costs: Although some personal loans have an origination fee, usually around 1 to 10 percent of the loan amount, they are often cheaper than the fees charged for payday loans.
• Longer repayment terms: Repayment terms often range from one to seven years, compared to the typical payday loan term of two to four weeks.
• Predictable monthly payments: You make monthly payments at a fixed rate, which means your payment remains the same throughout the life of the loan.
• Improved credit: The payments you make on your debt consolidation loan are reported to credit bureaus. Making payments on time can help improve your credit score.
• No rollovers: Once you have repaid the full amount of the money you borrowed, you are done and your account will be closed. If you need more money, you will have to apply for a new loan.

Disadvantages of a payday loan consolidation

Before you look for a personal loan to consolidate your payday loan debt, consider the potential drawbacks.

• Suitability: You may not qualify for a low interest rate. Depending on your creditworthiness, interest rates for debt consolidation loans typically range from about 6 percent to 36 percent.
• It can be temporary relief: While payday loan consolidation can solve an immediate problem, you may need help again if you find yourself living beyond your means or taking on more debt.

Alternatives to Payday Loan Debt Consolidation

Consider these alternatives if payday loan debt consolidation doesn’t sound right for your situation.

Extend the repayment period

In some states, payday loan lenders are required to extend your repayment period beyond your next paycheck. This could make payments more manageable. If you do not roll the balance over to another personal loan, you will not be charged any additional fees.

However, this option is not offered by every lender and largely depends on where you live. You may still be able to negotiate better terms with your lender even if you can’t extend the repayment period.

Debt relief

Debt relief can take several forms, including debt consolidation loans. Credit counseling can be a good option because it is often available for free or at a low cost, and they will help you find ways to manage your debts. However, it won’t reduce the amount you have to pay or change your terms, so consider credit counseling alongside other debt relief options.

A debt management plan (DMP) may also be available through your credit counseling service. With one, you work with a credit counselor to negotiate better loan terms with your creditors. Once you agree on a monthly payment, you send money each month to the credit union, which then pays your creditors.

It’s important to work with a reputable credit counseling agency, so research your options before signing up for a plan. Enrolling in a DMP will not directly affect your credit score, but you will likely have to close any accounts included in the plan, which could cause your credit to drop slightly and appear on your credit report.

Credit counseling agencies charge a monthly fee to process your payments, so a debt consolidation loan may be a cheaper option.

File Chapter 7 bankruptcy

Chapter 7 bankruptcy is a legal process in which some people can have some or all of their unsecured debts discharged. Some of your assets may be sold to pay off some of your debts.

This is usually a last resort because it has major consequences. Your credit score will be damaged, and it may be difficult to qualify for credit a few years after bankruptcy discharge.

If possible, try to get approved for a debt consolidation loan to minimize the lasting impact of bankruptcy on your credit and overall financial health. Consult an attorney before choosing this option.

In short

Payday loan consolidation can get you out of the perpetual cycle of having to take out a payday loan to make ends meet until your next payday. These loans have lower interest rates and fees than payday loans and can give you a more manageable monthly payment. Research debt consolidation loans before taking on more debt.