Payday loan consolidation: What is it

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Key takeaways

Debt consolidation loans have lower interest rates and longer repayment terms than payday loans, making them easier to pay off.
Payday loan debt consolidation is possible even if you have a low credit score.
Alternatives to consolidation include extending repayment periods, borrowing from friends and family, or seeking counseling from a nonprofit credit counselor.

Payday loan consolidation offers a lifeline for those struggling to repay costly loans. Every year, roughly 12 million Americans take out payday loans, according to The Pew Charitable Trusts. With their sky-high interest rates and short repayment terms, these loans are some of the most expensive options available. In fact, the Consumer Financial Protection Bureau (CFPB) found that most borrowers cannot repay the funds on time. This causes them to roll over the loan and traps them in an endless cycle of debt.

Consolidation is a popular payday loan debt solution. It can lower your overall interest rates and extend your repayment periods, which makes it easier to repay what you owe and regain control of your finances.

This article explores how to get out of payday loan debt through consolidation and the benefits it brings to those seeking payday loan relief.

What is payday loan consolidation?

If you’re struggling with how to pay off multiple payday loans, consolidation may be for you. Payday loan consolidation is when you combine multiple loans into a single, more manageable personal loan. The new loan will have a lower interest rate, fewer fees, and a longer repayment term. This will reduce the total borrowing costs and make repaying the loan more affordable. One of the best things about payday loan consolidation is that it’s easy to do yourself.

How can you consolidate payday loans?

Consolidating payday loans is a strategic way to repay payday loan debt. It’s even possible to consolidate payday loans with bad credit. The best part is it’s actually pretty easy to do.

Figure out how much you owe
Research loan options and lenders
Prequalify and compare offers before you apply
Receive the funds and pay off your loans

Here’s a detailed guide on how to get rid of payday loans through consolidation:

Figure out how much you owe

The first step is to determine the total amount you owe. Gather all your statements and add up the balances. This includes the principal amounts, interest charges, and any additional fees.

It’s a good idea to know how much you owe so that you know how much you need to borrow. Don’t borrow more than you need.

Look for lenders

To refinance payday loans, you’ll need to find a lender that offers personal loans or debt consolidation services. Look for bad credit debt consolidation loans if applicable to your situation. Read reviews and ratings to help identify legitimate payday loan consolidation companies.

Many payday loan consolidation online options provide competitive rates and convenient application processes. You may have to pay a higher interest rate than someone with a good credit score. Your consolidation loan may come with extra fees like an origination fee. Still, it’s a better deal.

If you’re a member of a federal credit union, you may be able to get a payday alternative loan (PAL). These loans have lenient requirements and their interest rates are capped at 28%. The lower interest rate makes them a more affordable option.

Prequalify and apply for a consolidation loan

After identifying potential lenders, the next step is to prequalify. Prequalification involves a soft pull, which doesn’t affect your credit score and gives you an estimate of the terms you might qualify for. This step helps you narrow down your options to choose the best offer.

To prequalify, you’ll need to provide basic information about your income, employment status, and existing debts. Lenders use this information to assess your creditworthiness and determine the loan amount, interest rate, and repayment terms to offer you.

Once you’ve prequalified, review the offers. Compare the interest rates, fees, repayment terms, and loan amounts. Choose the one with the lowest APR and shortest repayment term you can afford.

Once you’ve selected your loan, submit a formal application. This will involve a hard credit check, which can temporarily lower your score. You will also have to submit additional documentation.

Pay off payday lenders

After your consolidation loan is approved, the lender will send you the funds within one to three business days. Use the money to pay off your existing payday loans. The best payday loan consolidation companies may offer discounts for a debt consolidation loan or offer to pay your lenders directly.

Next, start making monthly payments on your new consolidation loan. Set up a budget to ensure you can comfortably manage these monthly payments. Autopay is a useful tool to help you stay on track and avoid late fees.

How can consolidation help with payday loans?

Consolidation can provide significant payday loan debt relief for anyone overwhelmed by multiple high-interest loans. It’s pretty easy to get a payday loan when you already have one. Many people take out multiple payday loans and then find themselves unable to repay them as agreed. According to the Consumer Financial Protection Bureau, over 80% of payday loans are rolled over into a new loan within 14 days. This leads to a cycle of borrowing that becomes increasingly difficult to escape from.

Payday loan debt relief through consolidation breaks this cycle and helps you pay off what you owe. It combines all your loans into a single, more affordable one with lower interest rates and extended repayment terms. This simplifies the repayment process and helps you avoid the cycle of debt.

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Will payday loan consolidation hurt my credit score?

How payday loan debt relief affects your score depends on how you manage the new loan. Unlike payday loans, your new personal loan will have an impact on your score.

When you apply for a consolidation loan, the lender will conduct a hard inquiry. This will cause a slight dip in your score, but its effect is temporary and not a big deal. Experian found that scores drop 5 points or less on average. Over time, your score will rebound.

What is much more important is how you repay the new loan. Lenders will report your payments to the three major credit bureaus – Experian, Equifax, and TransUnion. Make consistent on-time payments each month, and you should see your score go up.

Missed or late payments, on the other hand, will significantly hurt your score. Negative marks like these stay on your credit report for up to seven years, though their effect on scores lessens over time. To avoid missing payments, set up autopay or reminders on your phone.

Consolidation and your credit score

Find out how to consolidate debt without hurting your score.

Payday loan consolidation or debt settlement?

When seeking debt relief, you’re often faced with the choice between consolidation and debt settlement. These are two very different options with varying effects on your credit score.

Consolidation combines multiple loans into a single personal loan with lower interest rates and extended repayment terms. This method simplifies payments, saves you money on interest, and can improve your credit score over time by ensuring regular, on-time payments. It doesn’t reduce the principal amount you owe but makes managing your bills easier.

It’s time to be done with debt!

Check out how to get out of credit card debt.

Alternatives to consolidating payday loans

Consolidation is a popular option when you have too many payday loans, but it’s not the only solution. Several alternative payday loan relief programs exist. A few options to consider are:

Extend repayment terms

One way to achieve debt relief is to negotiate with your lender to extend the repayment period. Many payday lenders are willing to work with borrowers to set up extended payment plans (EPPs). This can spread out the repayment over a longer period and reduce the financial strain of large, lump-sum payments.

To set up an EPP, contact your payday lender directly and explain your financial situation. Most lenders have specific procedures for establishing these plans. Under an EPP, the lender may waive rollover fees and request smaller payments next payday. Either way, an EPP makes repaying the money more manageable.

Extended repayment periods can significantly relieve the burden of a lump sum payment and give you more breathing room in your budget. This isn’t available in every state or with every payday lender, but it’s a good option to consider.

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Debt relief options

Various debt relief options exist that involve working with creditors to decrease the amount you owe.

Debt settlement companies negotiate with payday lenders, aiming to reduce the principal amount you need to pay. This can result in substantial savings, but it often comes with negative impacts on your credit score and potential tax consequences.

Credit counseling agencies offer personalized advice, can help you create a budget, manage your finances, and develop a debt management plan (DMP). Under a DMP, the credit counseling agency will negotiate with your lenders and try to get them to reduce your interest rate and waive fees. You then make a single monthly payment to the agency, which in turn distributes the funds to your creditors. A DMP helps you repay what you owe more effectively and save on interest and fees.

Both options provide structured ways to achieve payday loan debt relief.

Loans from friends and family

Another possibility is borrowing from friends or family. If you have a support network willing to lend money or help, this can be an effective way to get out of payday loan debt without applying for a new loan.

Before approaching friends or family, consider how much you need and how you plan to repay the loan. Be honest about your financial situation and provide a clear repayment plan to ensure that you can maintain trust and avoid straining relationships. It’s a good idea to draft a loan agreement outlining the initial amount, repayment terms, and any interest to ensure clarity and avoid misunderstandings.

Think debt management is the right option for you?

Check out the best debt management plans.

Frequently asked questions

1. Can you use debt consolidation for payday loans?

Yes, you can consolidate payday loans. This process involves taking out a new loan with a lower interest rate to pay off multiple high-interest loans. By consolidating your loans, you simplify your payments into a single monthly installment, making it easier to manage and saving you money.

2. Will payday loans settle?

Yes, they often can be settled. Lenders may agree to settle for a reduced payment if they believe it’s the best way to recover some of the money owed. However, settling can negatively impact your credit score, so consider this option carefully.

3. Do debt management plans work with payday loans?

Yes, debt management plans (DMPs) do work. A DMP involves working with a credit counseling agency to consolidate your loans into a single, manageable payment. The agency negotiates with lenders to reduce interest rates and fees, making it easier to repay the money owed over time. This structured approach can help you regain financial stability.

4. How can I consolidate my payday loans?

The easiest way to consolidate your payday loans is to apply for a personal loan and use it to pay your payday lenders. You are then left with a single loan at a lower interest rate. This can simplify repayment and reduce overall costs.

5. How to end high interest installment loan debt?

You could refinance to a lower-interest loan, negotiate better terms with your lenders, or set up a debt management plan. Whichever option you choose, it is still essential to create a budget and stick with it.

6. Can you have multiple payday loans at once?

Yes, it is possible, but it is generally not advisable. Managing multiple payday loans can lead to a cycle of debt due to high interest rates and fees. The more debt you have, the harder it is to repay what you owe.

7. How can I get out of a cash advance?

You can negotiate with your lender, apply for a personal loan, or seek financial assistance from a credit counselor.

8. How to get payday loan debt relief?

There are plenty of payday loan relief programs. The right one depends on your financial situation. Look into debt management plans, debt consolidation, and debt settlement. All three can help reduce what you owe and make repayment more manageable.

9. How to pay off payday loans faster?

The first step is to set up a realistic budget and cut back on unnecessary expenses. Then, use all your extra funds to pay off your loans. Another option is to take on a second job and use that money to repay lenders.

Bottom line

Payday loan consolidation can help you break free from the cycle of debt. Instead of repaying what you owe in a lump sum with your next paycheck, you can repay the loan in installments over a few months. No more rolling over payday loans. The key is to qualify for a loan with a lower interest rate, fewer fees, and affordable monthly payments. This isn’t hard to do, even if you have bad credit.

No one has to be stuck in debt. Consolidation is one way to end the cycle and achieve financial stability.

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Rachel Alulis

Rachel Alulis has been the lead editor for Moneyfor’s credit cards team since 2015 and for the financial rewards team since 2023. Before joining Moneyfor, Rachel worked at USA Today and the Des Moines Register. She then established a successful freelance writing and editing business specializing in personal finance. Rachel holds a bachelor’s degree in journalism and an MBA.

Payday Loan Consolidation: How It Works