Payday loan consolidation means paying off several short-term loans by getting a larger loan with a set payment plan. Payday loan consolidation aims to make the cost of existing debt smaller, simplify payments, and break the continuous borrowing cycle that payday loans can sometimes cause.
There are several different ways of consolidating payday loans. Taking out a personal loan, drawing from a home equity loan or home equity line of credit, and moving the debts to a balance transfer credit card, are three of them.
Below, you’ll find a complete description of how and when to consolidate payday loans, along with some alternative methods of handling payday loan debt.
When Do You Need to Consolidate Payday Loans?
You should consolidate payday loans when you get to the point of having to renew them again and again. You need to pay back payday loans in one payment after 2 to 4 weeks. However, payday loan providers may give you extensions to pay them off if you cannot pay by the date due. In that situation, you only pay the interest on the loan, not the balance. Your due date then gets changed to a few weeks later with a new set of interest charges added.
Around 80% of payday loan recipients renew their loans at least once, says the Consumer Financial Protection Bureau. That adds up to even more fees, on top of the already high price of a single payday loan. So people who are in the circumstances where they would need to renegotiate one or more payday loans should pursue refinancing and consolidation instead.
Sadly, payday loan consolidation doesn’t relieve you from the responsibility of repaying the original payday loan’s exorbitant fee. That might be a hefty charge, too, considering payday loans are infamous for fees that can reach up to a 400%+ APR. But consolidation makes it so that you don’t have to renew the payday loan and shovel out another fee in the process. You’ll be able to pay down the remaining balance at much less expensive rates.
How to Consolidate Payday Loans
Consider All the Ways of Consolidating and Pick the Best One for You
Credit cards are the easiest way to consolidate if you already have a good one open, but personal loans are speedier for a new account’s approval and funding. Personal loans, home equity loans, and HELOCs Need collateral and take longer. But they are the cheapest overall.
Get Pre-Qualified if You Can
You may pre-qualify for a loan or not; it depends on the consolidation method and lenders you use. If you can, checking for pre-qualification will give you a good idea of what approval chances and interest rates to expect.
Submit an Application
You’ll need to give personal information (your name, address, and SSN) and financial information (income and rent/mortgage).
Get Your Funds, if Approved
It can take anywhere from a week to over a month to get your funds; it all depends on how you consolidate your payday loans.
Pay off the Payday Loans
After you receive the money, you can pay off your short-term loans by check or cash. Some lenders may be able to pay your old creditors directly. If you do a balance transfer, the credit card company handles the payoff. Then after you’ve consolidated your payday loans, you’ll owe the debt to the new creditor at a lower interest rate. It will be easier to be debt-free sooner.
Now that you understand the fundamental process for payday loan consolidation, it’s time to learn in detail about the different ways to consolidate.
Payday Loan Consolidation Options
An easy way to consolidate credit card debt is with a personal loan. The best debt consolidation loans make your debt more manageable by putting it all in one place. They might also provide lower interest rates and fees too.
Balance Transfer Credit Card
Credit card interest rates are usually in the double digits, so keeping a balance on your credit card is probably costing you a lot. But one way to manage that debt is to choose the right card.
Americans carry an average balance of $5,313, and there’s a lot of opportunities to save money with a balance transfer credit card. These cards offer zero interest on balance transfers for a specific period of time — at least six months to 20 months. During the introductory 0% APR period, you can pay off debt without costly interest charges.
Home Equity Loan
Leverage the amount you already have. Home equity generally refers to how much you could currently sell your home for, minus how much you still owe on it. Lenders can use that figure to secure a reasonably low-interest loan that can save money.
Home Equity Line of Credit
Home equity loans and HELOCs use the equity that you have in your home—the difference between your home’s value and your mortgage balance—as collateral. Lenders secure these loans against your home’s equity value, so home equity loans have incredibly competitive interest rates—normally close the first mortgage. Unlike unsecured borrowing sources, like credit cards, you’ll be paying much lower financing fees for the same loan amount.
Now that you know about the basic approaches to payday loan consolidation, you’re ready to learn about how each one works. We’ll go over methods in greater detail below.
More About How Consolidation Payday Loans Work
- Personal Loan – You can use personal loans for about any expense, which includes consolidating payday loans. Unsecured personal loans require a score of 585+, but there are also secured personal loans that accept applicants of all credit scores but call for collateral. First check for pre-qualification. Then, you can see the rates you’re going to get if approved and compare them to your payday loan rates now. Next, apply. If accepted, use the personal loan to pay the payday loan. Many personal loan providers can also pay off your payday lender directly, skipping the need for you to send a check yourself.
- Balance Transfer Credit Card – If your credit card issuer permits it, you could move a payday loan balance to a credit card through a balance transfer. Then you’ll owe the debt to the credit card issuer instead. A good scenario would be to use a card with a 0% introductory APR on balance transfers. However, you can transfer a balance to most credit cards. Even the most expensive credit card will be less costly than a payday loan.
- Home Equity Loan – Just like a personal loan, You can also use a home equity loan for whatever you want, but instead of being unsecured, you can secure the loan with your home. You face foreclosure if you cannot pay it back, however. Home equity loans usually provide less expensive APRs than personal loans or credit cards.
- Home Equity Line of Credit – A HELOC operates precisely like a home equity loan, except instead of getting a single sum, you can borrow up to a set amount of money at any time. The terms are very comparable to those on most home equity loans.
Advantages and Disadvantages of Consolidating Payday Loans
There are several advantages to consolidating payday loan debts. One is the fact that you can save money. Consolidating is much less expensive than re-upping the payday loans and doing another round with enormous fees.
Plus, consolidating payday loans allows you to pay them off over a long period of time – months instead of only weeks. If you consolidate multiple payday loans with one lender, you’ll only have to worry about making one monthly payment.
Those are all reasons that so-called do-it-yourself payday loan consolidation is an effective strategy. There are, however, a few other debt solutions you may want to consider instead.
Alternatives to Payday Loan Consolidation
The three main alternatives to payday loan consolidation work very differently and are useful in unique situations.
Tell your payday creditor that you can’t afford to pay the whole loan amount but can give them a lump sum to have the rest forgiven. The lender might agree to the debt settlement if they know that otherwise, you can’t pay at all, especially if it means they’ll have to go through the process of a court action.
With payday loans, this involves paying a “payday loan consolidation company,” which then sends payments to your lenders after negotiating a lower rate with them. Some of these companies work ethically, while others do not. The best way is to find programs from non-profit organizations.
Some organizations will give you advice on how to get rid of your payday loan debt for free. Others may charge you. Stay away from the ones that cost you money; you already have any debt to pay off.
Payday loans are suitable for the vast majority of people. Problems only occur when people don’t use their common sense and overuse them.
BankThink Why Payday Loans Are Good for Millions of People
Some say payday loans are bad, but my opinion is that it depends on the borrower’s common sense. This excerpt from an article by Kevin Wack of americanbanker.com says it far better than I can.
The Justice Department and state regulators target banks that service a broad range of what they consider questionable financial ventures, including some online payday lenders. I applaud the government’s efforts to weed out bad actors that engage in fraudulent transactions or violate federal laws. But I’m deeply concerned about the unintended consequences this could have on much-needed financial services for underbanked people who rely on legitimate short-term lenders, commonly referred to as payday lenders.
Payday lending is pretty simple. An individual has an urgent short-term need for cash and goes to a payday lender. A person with a job, a checking account, and proper identification can borrow anywhere from $100 to $500 until their next payday. Such borrowers write post-dated checks or provide written authorizations to the payday lender for the loan amount plus a fee, which is typically 15%. On the next payday, the loan is either repaid in person by the borrower, or the lender cashes the check or initiates an electronic funds transfer. That’s it.
Lenders complete the typical first-time payday transaction within 15 minutes. Very few banks are willing to make these loans the transaction costs are too high.
Millions of middle-income Americans live paycheck to paycheck. They do their best to manage their finances to meet all their obligations. But when something unexpected crops up, such as a blown transmission, an unexpected doctor’s bill, or a badly needed roof repair, this throws off their financial schedules, and the need for short-term credit may arise.
Some turn to relatives or friends for help in a crunch. But many may face Hobson’s choice of deciding between having their electricity turned off, their car repossessed, their job lost, their rent or mortgage unpaid, or their check bounced. Payday lenders offer a better way out.
Critics of payday lending cite the high-interest rates they charge. A $15 fee on a $100 advance for two weeks amounts to a 391% annual percentage rate or APR. That’s high when expressed as a yearly rate, but keep in mind that these loans’ typical term is a couple of weeks. It’s also notable that the average payday loans’ annualized interest rate is much lower than it would be for the fee on a bounced check or a late mortgage or credit card payment.
The $15 cost of a $100 payday loan also pales compared to the lost income when a car is out of commission and a job lost. Good payday lenders clearly disclose their loan terms and conditions, including the dollar amount of any fees and the APR. Moreover, payday lenders are regulated and supervised by state agencies and the new federal Consumer Financial Protection Bureau. My firm has worked with payday lenders to get them into compliance with regulations applicable to banks.
Some online lenders avoid regulation by setting up operations offshore or on an Indian reservation outside the reach of regulators. I applaud the regulators for attempting to shut down such operations by denying them access to the banking system.
The regulators would do well to examine borrowers’ welfare in various regulatory settings before they act in a way that might endanger the very people they are trying to protect , the underbanked. The truth is that millions of customers have a very favorable experience with the short-term lending product, and we should be careful not to disrupt this critical lifeline.