What is Payday Loan Consolidation and How Does it Work?

If you’re wondering how to get out of payday loans, consolidation can help. It merges your loans into a single, more manageable one with a lower interest rate. But while payday loan consolidation can be a strategic move to improve your financial health, it doesn’t exactly eliminate the loan and might be not right for everyone.

Here’s how to consolidate payday loans, with all the pros, cons, and details in between.

How does payday loan consolidation work?

Instead of paying off multiple payday loans over time, you take out a separate loan and use that money to pay the original loans.

Most borrowers work with a payday loan consolidation company or a financial institution specializing in debt consolidation. That’s because these options can better understand the situation and offer effective agreements.

When you apply for the new loan, the institution assesses your whole financial situation, including outstanding debts and your ability to repay. If accepted, you get a loan that’s enough money to cover your payday loans. You pay off the original loans and start making regular payments to the consolidation company or financial institution.

It might sound like taking on another loan isn’t a good solution to a debt problem. But the thing about payday loans is that they usually have astronomically high annual percentage rates (APRs) — like 400%. An average online personal loan rate is closer to 15% APR for borrowers with good credit. Even if you have the same amount of debt, you save a lot of money on interest. And with only one loan to repay, the whole process is much simpler.

How to consolidate payday loans: 6 steps

Here’s how to get payday loan debt relief through consolidation:

1. Assess your debts

Start by compiling a list of all your outstanding payday loans, including the amount you owe and the interest rates. This gives you a full picture of the debt to show potential repayment services.

2. Research consolidation options

Search for and compare different lenders and companies that offer payday loan consolidation services. Look for reputable institutions with favorable terms and interest rates. If a company seems off, don’t sign up. It’s not worth the risk to your finances.

To hear authentic customer experiences, check Google reviews and similar feedback sources. It’s also a good idea to search your choice with the Better Business Bureau to make sure it’s a reputable company.

3. Apply for a loan

After selecting a company, apply for a consolidation loan. Provide all required documentation and information, like proof of income and identification.

Make sure you can handle the new loan amount and potential payment plan. The point of this whole process is to lessen the load, and so avoid taking on another one that you also can’t pay.

4. Receive the funds

If approved, you receive the funds from the consolidation loan.

5. Pay off your payday loans

With the consolidation loan money, pay off your existing payday loan debts in full. This will close those accounts and bring your debts together into a single loan.

6. Pay off your new loan

Pay the new loan according to the installment plan.

The pros of payday loan consolidation

Here are all the benefits of consolidating your payday loans:

1. Lower interest rates

Payday loans often have high interest rates, while personal loan rates are much lower. Plus, consolidating debt into one place often gets you a lower overall interest rate, reducing the total amount you have to pay over time.

2. A single monthly payment

Instead of juggling due dates and interest rates, consolidation brings everything into a single monthly payment, which is more convenient and easier to track.

3. Better repayment terms

Consolidation loans typically come with longer repayment terms, spreading out installments over a more manageable period and reducing your monthly financial burden. Instead of paying over a few weeks, you have a few months or even years.

4. Financial relief

When you consolidate loans, you don’t get immediate financial relief. But with lower interest and only one loan, you’ll have lower stress and anxiety. You have more control over the situation.

The cons of payday loan consolidation

Payday loans aren’t for everyone. Here are the cons:

1. Potential fees

Some consolidation programs and lenders charge fees, which could cancel out some of the financial benefits of consolidating payday loans.

2. Extended repayment period

While longer repayment terms can reduce monthly payments, they also mean you'll be in debt for a longer period. If you have the money to pay the loan, you might as well pay it off faster.

3. Risk of further debt

Consolidating payday loans doesn’t address the underlying financial difficulties that led to the need for a loan in the first place. You risk falling back into debt.

4. Credit score impact

Depending on the consolidation method, there may be a temporary negative impact on your credit score, particularly if you close existing accounts or apply for new credit.

Does payday loan consolidation hurt your credit?

Consolidating payday loans typically doesn't hurt your credit in the long run, but there may be short-term effects.

A consolidation loan may result in a hard check on your credit report, which could temporarily lower your score. But as you repay the consolidation loan responsibly and make timely payments each month, your credit score should gradually improve.

In the long term, payday loan consolidation can actually benefit your credit. When you pay loans and manage debts more effectively, you demonstrate responsible financial behavior to creditors. This can positively impact your credit score over time, making it easier to qualify for better interest rates on future loans and credit cards.

4 other ways to pay off payday loans

If you need help with payday loans but consolidation doesn't seem like the right option for you, here are some alternatives:

1. Credit counseling

Seek assistance from a reputable credit counseling agency. These organizations can help you create a budget, negotiate with creditors, and develop a debt management plan.

2. Employer assistance programs

Some employers offer financial assistance programs to employees facing financial hardships. It doesn’t hurt to talk to your employer about potential opportunities. These programs may include employee loans, advances on paychecks, or other forms of support to help you cover unexpected expenses.

3. Ask for help from friends or family

Reach out to friends or family members who may be willing to lend you money or provide financial assistance to help you pay the loans. You’ll avoid fees and interest from lenders. Just make sure you discuss the details with friends and family before taking money, like if they expect you to pay them back and under what constraints.

4. Negotiate with lenders

Contact your payday lenders directly to discuss repayment options. Some may be willing to work with you to develop a repayment plan or offer a settlement to reduce the amount. Be proactive in communicating with your lenders and explore all available options.

3 alternatives to payday loans

If you need cash quickly but want to avoid the high fees and interest rates associated with payday loans, consider these alternatives:

1. Cash advances

Cash advance services let you borrow money against your existing credit card. You can withdraw cash straight from an ATM or bank. The amount and interest depend on your provider, so check first before using this option.

2. Payday Alternative Loans (PALs)

If you use a credit union, try a PAL. It’s a short-term loan designed to give borrowers a more affordable alternative to payday loans. These loans typically have lower interest rates and more flexible repayment terms. PALs may require membership in the credit union and may have eligibility requirements.

3. Personal installment loans

Instead of resorting to payday loans, explore options for personal installment loans from reputable lenders. These options let you borrow a fixed amount of money and repay it over time with regular installment payments. Personal installment loans often have lower interest rates and more manageable repayment terms.

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