Payday Loan Consolidation: What Is It And How To Use It?

In case you have a payday loan that charges astronomical fees, you might find yourself overwhelmed with the payments. This is a very difficult type of debt to repay because it tends to trap people in a loan cycle. Payday loans are taken out by 12 million people every day. Unfortunately, over 80% of these loans are turned into a new loan because the borrower does not pay back on time. If you’ve been facing any issues with your personal loan, or if you’re curious about it in general, you’ve come to the right place. In this article, we will look at the different ways to alleviate payday loan debt. According to the article published by One of these ways is payday loan consolidation. It helps you take out new loans at a lower interest rate and set up monthly payments that can be paid over time.

What Are Payday Loans?

Payday loan is a term used to describe short-term loans taken out for a small amount (around $ 500). Unlike most loans, these loans do not have a payment period that spans several years. You are supposed to pay off your loan on your payday. These payday loans are often touted as useful gateways to help people between paychecks. However, payday loans come with fees that result in extremely high annual percentage rates (APRs). Take the example of a small loan with a fee of $ 15 per $ 100 borrowed. At first glance, this doesn’t sound so bad, but over time it translates to an APR of almost 400% (according to the Consumer Financial Protection Bureau).

Can Payday Loans Help With Credit Ratings?

No, payday loans usually do the opposite. They cause more damage to your credit than they increase it. These loans are not reported to the credit bureaus, so even if you repay everything on time, your credit scores will not get any boost because of it. On the flip side, if you don’t pay it back on time and your lender sends your account to collections, it will actually show up on your credit report, damaging your credit scores.

According to information released by the Pew Charitable Trust, only 14% of payday loan borrowers have the capacity to repay their loans. The excessively high costs make the loan somewhat unmanageable for borrowers. Therefore, taking out a new loan with a lower fixed interest rate might be a better way to get your finances back on track.

How does payday loan consolidation work?

With a debt consolidation loan, you can take out a low interest loan and use the funds to pay off all your high interest debts. After that, you can repay the debt consolidation loan over time. The monthly payments for these loans are much easier to manage than the amount that you will have to shell out for payday loans. This is because the interest rate on a debt consolidation loan should be much lower and you are paying off the loan over a longer period, typically 12 to 84 months, rather than within two weeks.

How to get a payday loan consolidation?

Start by finding a lender who offers debt consolidation loans. A few online lenders can do a prequalification check. You shouldn’t worry about it hurting your credit score, it doesn’t. The lender will also review your credit reports and estimate the interest rate, loan term, and monthly payment you may be eligible for. Before you apply for the loan, make sure that you are able to afford it each month. Unlike a payday loan, debt consolidation loan payments are reported to the credit bureaus. So, if you pay on time, you will also benefit from a boost to your credit rating.

What are the advantages of a payday loan consolidation?

Debt consolidation loans generally offer:

  • Lower Fees: Some personal loans will charge 1-5% of the loan amount as a origination fee. However, if you look closely, you may be able to find a loan that does not come with such fees.
  • Flexible repayment terms: Personal loans offer long and flexible repayment terms that typically range from 12 to 84 months. Payday loans are typically repaid every payday, so within two to four weeks.
  • Predictable monthly payments: With a personal loan, all you need to do is make one-off monthly payments until your loan is paid off. With a fixed interest rate, this amount stays the same throughout the loan repayment term.
  • Credit Check Required: While it may seem worrisome at first, this is done to make sure you can afford the monthly payments before signing up for the loan. The payday loan consolidation provider will usually check your source of income, check your credit reports, or ask about cash reserves. They might be willing to work with you even if your credit rating is low. Payday lenders do not do such checks and you could be overwhelmed with loans that you cannot repay.
  • No rollover: when you pay your last installment, you’re done with the loan. Your account is closed and the loan is marked as paid off. In case you want more money, you will have to apply for a new loan and borrow money through it.

What are the disadvantages of a payday loan consolidation?

Payday loan relief probably sounds good, but you should consider these points before applying for a new personal loan:

  • You are still likely to default on open payments. Even if you had planned to pay everything on time, some unexpected event in your life could take a toll on your finances. Any missed or late payments could damage your credit score, and the loan consolidation lender may send your account to collections. In order to deal with financial emergencies, save at least 3-6 months of living expenses in an emergency fund.
  • You might not qualify for a low interest rate. Depending on your creditworthiness, the interest rates for a personal loan can vary from 4 to 36%. While many online lenders can work with people with low credit scores, they can charge very high interest rates as well. They are, however, still lower than the costs of a payday loan, which can have APRs of around 400% or more. If you are a member of a credit union, you can also get small, short term loans with affordable interest rates.

What are the alternatives to consolidating payday loans?

If the payday loan consolidation doesn’t seem like the right solution for you, you can also try these other options:

  • Request an extension of the repayment period: Under the laws of some states, payday lenders are required to extend your repayment period beyond your next paycheck. This can come in handy as the payments will be smaller and you will have more time to collect the money. Contact your payday lender, find out about this option, and inquire about the fees.
  • Start a Debt Management Plan: As part of a debt management plan, you work with a credit counselor to negotiate better loan terms with your creditors. After accepting a monthly payment, you will need to start sending funds to the credit agency each month. After that, the credit agency will pay your lenders. It’s important to work with a reputable credit counseling agency, so don’t jump into a plan without doing your research.
  • Chapter 7 Bankruptcy File: Chapter 7 bankruptcy is a legal process that allows people to get rid of all or part of their debts. It’s not as easy and simple as fair to declare bankruptcy. The process is quite strict and some of your assets can be sold to pay off debt. Declaring bankruptcy has major consequences, so only use it as a last resort. This will cause significant damage to your credit score and you will have a hard time qualifying for credit after bankruptcy. It is best to consult a lawyer before opting for this option.

So that was a brief glimpse into the world of payday loan consolidation. Hope you now have a better understanding of the concept and can use it yourself if the need arises.