Payday Loan Consolidation: What You Need To Know

If you have one or more payday loans, you may be looking for an affordable way to eliminate that debt. Payday loan consolidation is one way to pay off your payday loans. It often works by replacing your payday loan debt with a personal loan that has a lower interest rate and lower fees.If you’re new to payday loans, we’ll cover how they can quickly become problematic. We’ll also review the payday loan consolidation process step by step so you can escape the payday loan debt cycle.

How do payday loans work?

Payday loans are appropriately named because they are short-term, high-risk loans that are usually due on your next payday (within two to four weeks). Generally, payday loans are issued in small amounts of $500 or less, and come with exceedingly high annual percentage rates (APRs).

Lenders don’t review your credit, which makes it relatively easy to qualify for a payday loan. However, most want to see that you’re employed with a regular paycheck. To better ensure they’ll get their money back, most also require some sort of guarantee that you’ll repay. This is typically either a written authorization that allows them to electronically debit your checking account when the loan is due, or a post-dated check the lender can cash on the date listed (if you don’t repay the loan sooner).

Usually, you’ll need to cover the entire balance due, including fees, with one payment. However, some payday loan lenders will allow you to pay off the debt in multiple installments.

The problem with payday loans

“Payday lenders are notorious for predatory lending practices,” said Leslie Tayne, principal attorney and founder of Tayne Law Group, P.C. Lenders have been caught “not fully disclosing terms, lending to borrowers who can't afford to repay the loans, and engaging in aggressive collection practices.”

There are many problems with payday loans — especially if you have multiple. Here are three of the biggest:

• Excessive cost to borrow: While many states limit how much a payday lender can charge, you’ll still generally pay $10 to $30 in fees for every $100 you borrow. Since your loan term is short, your effective annual percentage rate (APR) could be near or over 400%.
• Potentially negative impact on credit scores: Generally, payday loans don’t get reported to the credit bureaus, so they won’t boost your score. However, if you don’t pay as agreed and your lender sells the debt to a collection agency, that data could get reported and damage your credit score.
• The debt cycle: If you can’t repay the payday loan on time, your lender may suggest you renew the debt or roll it over, which can lead to an expensive pattern of payment delays. This is because each time you roll over a payday loan, you’ll pay additional fees.

How to consolidate payday loans

The process of consolidating your payday loans involves paying them off using a single, lower-cost, loan. A personal loan is often used to consolidate payday loans, and is a good option if you can qualify.

A personal loan is an installment loan issued as a lump sum. You may be able to borrow hundreds or thousands of dollars and have up to several years to repay the debt. Your monthly payment stays the same over the life of the loan.

Here’s how to get a personal loan to consolidate your payday loans:

1. Check your credit: While payday loan lenders don’t care about your credit history and credit score, most personal loan lenders do. It can be difficult to qualify for a personal loan if your FICO credit score is below 660, but some lenders offer personal loans for bad credit and have lower credit score minimums.
2. Shop around and compare lenders: Visit lender websites or an online lending marketplace to get prequalified. Getting prequalified for a loan lets you see the rate and terms you may be approved for and won’t hurt your credit score. Compare APRs between lenders to see how much each loan costs.
3. Choose your loan and apply: Determine the best personal loan for your situation and submit a formal application. Provide the lender with any required supporting documentation requested (like tax returns or pay stubs).
4. Review loan terms: Before signing the loan agreement, review the loan’s terms and fees. If the lender charges an origination fee, for example, it may be deducted from the loan amount before it’s deposited in your bank account.
5. Receive your funds: If your application gets approved, sign your loan agreement paperwork and watch your bank account. You could receive your money the same day you’re approved, in some cases.
6. Pay off your payday loans: Get rid of your payday loan debt immediately. Your personal loan lender may be able to send your funds directly to your payday loan lender.
7. Start repaying your personal loan: Check your personal loan agreement for the repayment start date, and make the required payments until the debt is gone.

Payday loan consolidation with bad credit

If you have bad credit, finding a lender to approve your application for payday loan consolidation can be challenging, but not impossible. Start by searching for lenders with low minimum credit requirements, such as Credible partner lenders Avant, Prosper, and Universal Credit.

If you can’t qualify on your own, search for lenders that allow cosigners, such as Laurel Road. A cosigner is usually a friend or family member who agrees to make payments if you default on the loan — if they have good credit, they can improve your chance of approval.

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Alternatives to payday loan consolidation

If you’re struggling with payday loan debt but don’t qualify for payday loan consolidation, there are other options:

• Credit counseling: Start by contacting a nonprofit credit counseling agency, such as the National Foundation for Credit Counseling (NFCC). The organization may be able to help you consolidate your debt, save money in interest and fees, or come up with a plan to repay your payday loans.
• Debt management program: A debt management program arranged through a credit counselor can be an effective way to pay off payday loans. A credit counselor contacts your creditors to negotiate lower rates and also manages the plan. Debt management plans may last 3 to 5 years.
• Payday alternative loans: Some credit unions offer members payday alternative loans (PALs), which are just what they sound like: small, short-term loans that are designed to be used instead of a payday loan. Credit unions are only allowed to charge up to 28% interest, which includes finance charges. Loans may be available up to $1,000 with terms up to 6 months.
• Bankruptcy: When all else fails, you may want to ask an attorney about filing bankruptcy. If successful, you could get your debt discharged or be enrolled in a court-approved repayment plan. If your debt gets discharged, you’ll no longer be responsible for paying it. Your credit will take a dramatic hit for some time, however.