How Payday Loan Consolidation Works

Payday lenders offer short-term small loans to borrowers who need cash fast. Usually, you don’t need to do a credit check to get money, and your payment is due in two to four weeks.

However, many borrowers are unable to repay their payday loans within two to four weeks. This can make an already expensive debt even more expensive, especially if you have multiple payday loans. To get out of the payday loan cycle, consumers can consider payday loan consolidation.

What is payday loan consolidation?

When you consolidate payday loans, you combine multiple loans so you can make one payment on your debt instead of multiple ones.

“I would define a payday loan consolidation as any method that allows you to escape the payday loan cycle,” says Omari Hall, learning experience designer at GreenPath Financial Wellness. The payday loan cycle, Hall says, is the experience of being forced to pay back the entire amount borrowed in a short amount of time at high interest rates.

You can consolidate payday loans by taking out a consolidation loan or by using a debt management or debt settlement program, says Anissa Schultz, director of debt management at the Credit Advisors Foundation.

What is the best way to track payday loan consolidation?

The appropriate choice depends on your situation, but you have options.

Debt Consolidation Loan

“It will usually involve a credit check, so it limits availability for people with severely compromised credit, but it’s probably still the best option,” says Martin Lynch, director of education at Cambridge Credit Counseling and president of the Financial Counseling Association of America. “I know replacing one loan with another loan doesn’t sound appealing on the surface, but if you can take advantage of a much better interest rate and only moderately extended tenor, then you’re better off.”

Consolidation loans generally appear on your credit report, while payday loans do not. Paying off a consolidation loan on time and in full can help your credit score over the long term, says Lynch.

Nevertheless, there can be risks when taking out a new loan. For the rare payday loan borrower with a decent credit history, a consolidation loan is a great way to stop high interest rates, Schultz says. But borrowers who default on consolidation loans could return to payday loan companies for funds to pay off their consolidation loans. “Loans are not a good way to get out of debt,” says Schultz.

debt management plans

Either working with a credit counselor on a debt management program or taking out a bank loan can be a good place to start depending on your situation, Hall says, though he notes that payday loan borrowers may have trouble qualifying for traditional loans.

“In a lot of cases, the people who are in these payday loan cycles often don’t have super good credit, so traditional bank credit would be available to them,” says Hall. At the same time, banks may not offer loans for low balances, e.g. B. $1,000.

Instead, consumers can consider debt management. That process involves a financial advisor working to reach an agreement with your creditors, according to the National Foundation for Credit Counseling. Your credit report includes a note indicating your participation in a debt management plan, although the NFCC says it won’t harm your credit score, and completing a DMP should help your credit score long-term.

Among other things, a DMP could prevent additional charges being incurred on your debt. You can pay a monthly maintenance fee to participate in the debt management program, but that amount is inexpensive, especially for consumers who are used to paying high interest rates, Hall says.

debt settlement

A debt settlement company may try to come to an agreement with your creditors to make you pay less than you owe. But paying off debt isn’t for everyone, and you should be aware of the risks.

The processing of a number of payday loans signals lenders that if they loan you, they’ll only get a portion of their money back, Lynch says. “That’s why the settlement is really a credit killer, as it alerts lenders to the thought that we might only get part of our money back. That’s a terrible signal.” Other downsides include “extraordinarily high” settlement fees and the possibility of being sued, Lynch says.

What are the pros and cons of payday loan consolidation?

This section focuses on debt consolidation loans and DMPs. Keep in mind that the pros and cons may vary depending on your situation and how you consolidate your payday loans.

Benefits of Consolidation Loans:

  • Lower interest rates. Payday loans can have an APR of 400% or more, while traditional bank loans or online lenders can offer much lower interest rates.
  • Different loan structure. A consolidation loan is an installment loan, so borrowers don’t “get into that vicious circle of ‘Oh, I’m just paying off part of the interest and you’re rolling my principle,’ and then it just keeps getting out of control and it seems like they never can come out again,” says Schultz.
  • Longer terms. A consolidation loan allows you to pay off your debt longer than a payday loan in two to four weeks.

Disadvantages of Debt Consolidation Loans:

  • You may not qualify. Consumers may not meet the lender’s requirements for income, creditworthiness, and other factors. It’s also possible that you don’t want to borrow enough money to be eligible, depending on a lender’s minimum loan amount.
  • A credit check is usually required. Generally, when you apply for a consolidation loan, the lender performs a rigorous review of your credit report, which can lower your score. “Because they want to expand their finances, they’re going to do a tough investigation, and that’s going to hurt their creditworthiness,” Schultz says.

  • Can prevent accounts from going into collections. Using a debt management program can help borrowers avoid being heard by collection agencies.
  • Borrowers may get better credit terms. It’s possible that lenders, for example, will agree to lower borrowers’ monthly payments and stop charging fees on account balances.
  • Can help borrowers with other financial matters. To get a DMP, you need to work with a nonprofit loan advisor who can help you with other parts of your financial life, not just your payday loans.

  • Lenders do not have to participate. While most payday lenders participate, “unfortunately, there is no mandate for payday loan companies to work with credit advisory organizations and their mutual clients,” says Schultz.
  • Lenders do not have to make concessions. Loan advisors “can’t necessarily secure benefits from payday lenders,” says Lynch, even though payday lenders almost always receive payments.

What are other options to get out of payday loan debt?

Consolidation loans and DMPs aren’t the only ways to get out of payday loan debt. Borrowers might also consider options such as:

  • Free advanced payment plans. According to the Consumer Financial Protection Bureau, more than half of states that allow payday loans also require payday loans to offer free advanced payment plans. These plans vary by state, but they allow borrowers to extend their loan terms without paying additional fees.
  • credit cards. The average APR for credit cards on the US news database is 15.56% to 22.87%, so paying off payday loan debt with a credit card also offers a lower interest rate. If you can get one, a 0% APR credit card will allow you to pay off your balance with no interest during an introductory period.

Consumers struggling with payday loan debt are not alone. “Getting into this cycle of debt isn’t something to be ashamed of,” Hall says, noting that in some communities there aren’t many other options. “A lot of my work focuses on the black and brown community, the inner-city disenfranchised community, and the fact of the matter is that these payday loan companies are far more prevalent in those communities than in other more established communities or more supported communities.”

And there are ways to get out of debt. “It’s not a situation where there aren’t any options or no (opportunities) to escape,” Hall says.

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