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. With their sky-high interest rates and short repayment terms, these loans are some of the most expensive options available. In fact, most borrowers cannot repay the funds on time, causing them to have to roll over the loan and trapping 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, making 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.
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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 easier.
How can you consolidate payday loans?
Consolidating payday loans is a strategic way to manage and eliminate 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 so you don’t borrow too much. Many personal loans are for over $1,000. If you have less than that, consolidation may not be your best option.
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. 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 good credit and 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%, making 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 and 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.
By choosing do it yourself payday loan consolidation, you take charge of your financial future.
Should you save for a rainy day or pay off debt?
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 the loans 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.
Will payday loan consolidation hurt my credit score?
New
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, 5 to 10 points, but its effect is only temporary and not a big deal. 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. Make consistent on time payments each month, and you’ll 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 mistakes like these, set up autopay or reminders on your phone.
Visit MoneyFor to learn more about your credit score.
Considering bankruptcy?
Find out how much you need to owe to make filing bankruptcy worthwhile.
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 involves combining 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 it makes managing your bills easier.
Debt settlement is when you or a debt settlement company negotiates a lump sum payment with your lenders. The lump sum will be less than the total amount you owe. This is sometimes referred to as payday loan forgiveness since you don’t have to pay the entire loan. Payday loan forgiveness programs can significantly reduce what you owe, but they have their detractions. These include:
- Not guaranteed to work
- Pay a fee of 15% to 25% of the original loan amount
- Tax implications
- Negative impact on your credit score
This negative impact is because you must stop making payments to convince the lender to settle. Also, lenders may report settled debts as partially paid, which can remain on your credit report for seven years, keeping your score down.
While both methods offer a way out of debt, consolidation focuses on making your payments more manageable without severely impacting your credit. In contrast, debt settlement seeks to reduce the amount you owe but can harm your score in the process. Carefully consider your financial situation and long-term goals when choosing between these options.
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), which 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, making repaying the money more manageable.
Extended repayment periods can significantly relieve the burden of a lump sum payment, giving 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.
Debt relief options
Various debt relief options help by negotiating with creditors to reduce 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 negotiates with your lenders to reduce interest rates 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.
Think debt management is the right option for you?
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.
Frequently asked questions
Bottom line
Navigating payday loan debt can be overwhelming, but multiple payday loan debt assistance programs are available to help you regain control of your finances. Consolidation is a powerful tool that simplifies your debt into a single, manageable payment with lower interest rates and an extended repayment. True, you’ll have to pay more in interest than a borrower with good credit, but it’s well worth it if it helps you get out of an endless borrowing cycle. It can also help you improve your score if managed well.
Alternatives such as extending the repayment period or borrowing from friends and family offer another way out. If you feel like you’re drowning in debt, reach out to a nonprofit credit counselor. They can help you find a way to break the cycle and achieve financial stability.
