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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 consolidation is possible even if you have a low credit score.
  • Alternatives to debt 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 payday loan borrowers are unable to repay the funds on time, causing them to have to roll over the loan and so trapping them in an endless cycle of debt.

If you need help with payday loans, debt consolidation is an option to consider. 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.

How does payday loan consolidation work?

Payday loan consolidation is a process that combines multiple payday loans into a single, more manageable personal loan. The new loan will have a lower interest rate and fewer fees, reducing the total borrowing costs. The strategy is designed to simplify the repayment process and save you money on interest and fees. Typically, you’ll want to have taken out a few payday loans for the process to be worthwhile.

Like with other forms of debt consolidation, you can use a personal loan or a balance transfer card. Most people opt for a personal loan, though if you qualify for a balance transfer credit card with a 0% APR, that would work too.

Personal loans are a good choice since they have lower interest rates and longer repayment terms than payday loans. Even if you have a poor credit score, the highest interest rate you’ll receive on a personal loan is 36%. This shines in comparison to the 400%+ APR (annual percentage rate) charged by payday loan lenders.

Repayment terms generally span two to seven years rather than two weeks. Instead of paying the lump sum plus fees at once, you make manageable monthly payments, making personal loans much easier to repay.

Consolidation not only simplifies your debt repayment but also helps you avoid the cycle of re-borrowing, giving you a clear path to becoming debt-free.

How payday loan consolidation can help

Consolidation can provide significant payday loan debt relief for anyone overwhelmed by multiple high-interest loans. If you owe a payday loan, you can get another one and many people do. 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 debt that becomes increasingly difficult to escape from.

Consolidation breaks this cycle by combining all your payday borrowing into a single, more manageable loan with lower interest rates and extended repayment terms.

This strategy simplifies your finances, allowing you to focus on a single lower monthly payment instead of juggling multiple due dates and amounts. Additionally, you’ll save money by getting a lower interest rate and avoiding late fees and penalties.

Payday loan debt relief through consolidation not only eases your immediate financial stress but also helps you regain control of your financial future. By preventing the need to take out new short-term loans, it stops the cycle of debt in its tracks, giving you a clear path to achieving financial stability and freedom.

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Does payday loan consolidation hurt my credit?

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 debt 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. Over time, your score will rebound.

The biggest factor in determining your credit score is your payment history. Having a personal loan can help you establish a positive payment history since 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. Set up autopay or reminders so that you never miss a payment.

Visit MoneyFor to learn more about your credit score.

Payday loan consolidation vs. debt settlement

When seeking payday loan 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 debt easier.

Debt settlement, on the other hand, is when you or a third party negotiates with your lenders to reduce the total amount you owe. This is sometimes referred to as payday loan forgiveness. Debt settlement can lead to significant reductions in your debt, but it has its detractions. These include:

  • Not guaranteed to work
  • Pay a fee of 15% to 25% of the original balance
  • 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 debt 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.

Read more about debt relief.

How to consolidate payday loans

Consolidating payday loans is a strategic way to manage and eliminate high-interest debt. The best part is it’s actually pretty easy to do.

  1. Figure out how much you owe
  2. Research loan options and lenders
  3. Prequalify and compare offers before you apply
  4. Get your money and begin the repayment process.

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

Add up your payday loan balances

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. Having an accurate total will help you understand the extent of your debt.

It’s a good idea to know how much you owe so that you know how much you need to borrow. You don’t want to borrow any more than you need. Many personal loans are for over $1,000. If you have less than that, consolidation may not be your best option.

Shop around for the best loan

Once you know how much you need to borrow, it’s time to shop around for the best offer. Look for bad credit debt consolidation loans – they do exist. Check online lenders, credit unions, and banks.

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 than a payday loan.

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 best offer

debt 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 lenders and begin repayment on your personal loan

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 loans.

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.

Remember, the goal is to reduce your debt burden and improve your financial health. Stick to your repayment plan and avoid taking on new high-interest debt.

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Alternatives to payday loan consolidation

Consolidation is a popular option for managing debt, but it’s not the only solution. Several alternatives can provide payday loan debt assistance. Here are some viable options to consider:

Extend the repayment period

One way to achieve debt relief for payday loans 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

Debt relief options, such as debt settlement or credit counseling, can also provide payday loan help. Both these services involve negotiating with creditors to reduce the amount you owe.

Debt settlement companies negotiate with payday lenders, aiming to reduce the principal amount of your debt. 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 manage your debt more effectively and save on interest and fees.

Both debt settlement and credit counseling provide structured ways to achieve payday loan debt relief.

Think debt management is the right option for you?

Check out the pros and cons of debt management plans.

Borrow from friends and family

Another option is borrowing from friends or family. If you have a support network willing to lend money or to help, this can be an effective way to get out of payday loan debt without going through an application process 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

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

Yes, they often can be settled. Debt settlement involves negotiating with lenders to reduce the total amount owed. Lenders may agree to settle for less if they believe it’s the best way to recover some of the debt. However, settling can negatively impact your credit score, so consider this option carefully.

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.

Bottom line

Navigating payday loan debt can be overwhelming, but there are multiple strategies 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 wipe out high interest debt and 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 with your lender 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.

By taking proactive steps to address your debt, you can build a healthier financial future.

About the author

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.