Payday loan consolidation: What it is and how it works

Payday loans let you access cash fast between paychecks. However, high fees and annual percentage rates combined with “by-your-next-paycheck” repayment requirements can put you into a hard-to-escape cycle of debt. Personal loans — debt consolidation loans in particular — can give you access to more funds with repayment periods that range between two and five years at most lenders. Understanding how personal loans can help you consolidate your payday loan could put you on a course to freedom from payday loan balances.

What is payday loan consolidation?

Payday loan debt consolidation works by refinancing one or multiple debts with a single personal loan, which will offer a lower interest rate and lower payment spread out over years instead of weeks. Lenders offer repayment periods as short as 12 months or as long as 84 months.

The balance can be repaid at any time without penalty, and you can generally borrow more than with a single payday loan. You can also get the funds quickly, sometimes the same day you apply. Average personal loan APRs are much lower than payday loans, which could save you money on interest and payday loan fees.

How payday loan consolidation can help

Payday loan consolidation can help people trapped in a cycle of having to take out one payday loan after another just to cover the fees from the previous one. Qualified borrowers can get a personal loan with rates capped at 36 percent — sometimes even with bad credit — compared to payday APRs, which can be higher than 400 percent.

Debt consolidation loan repayment periods give you more time in between payments, which can be a big relief if it’s getting more difficult to repay your payday loan every two weeks. They can also be funded just as quickly as payday loans, which means relief could be just a day away if you qualify.

The longer repayment period means that interest has more time to build, so you may end up paying more in total than you would by just paying off the original payday loans with a lump sum. However, if you anticipate you’d have to roll your payday loan over multiple times before you could afford to repay it, a personal loan may actually help you save.

Payday loan consolidation numbers in action

Let’s say you’re considering a personal loan to pay off a $500 payday loan. You have bad credit, but qualify for a one-year term with a 10 percent origination fee and 36 percent APR.

Repaying the payday loan all at once is the cheapest option, but in this scenario you can’t afford to do that. You’ll have to save up across multiple paychecks, rolling over the payday loan several times, if you don’t opt for the debt consolidation loan.

What the numbers mean

• The personal loan means much smaller individual payments.
• You have a year to pay off the balance with the personal loan.
• You’ll spend over $100 more total over the life of the loan than if you were able to pay your payday loan off all at once — but you’ll save about $75 compared to rolling over the payday loan four times.
• You can make extra payments with the savings to pay your personal loan off faster, saving you interest.

Should you consolidate your payday loans?

It makes sense to consolidate payday loans if you find you’re unable to repay them easily with each paycheck. You can take advantage of the extra monthly savings by using some of it to pay the balance down faster. It might also make sense to add some money to an emergency savings account so you don’t have to turn to borrowing in the future.

Benefits of payday loan consolidation

If you need payday loan help, a consolidation loan can help you get your finances back on track. Debt consolidation loans typically offer:

• Lower fees: Although some personal loans come with an origination fee, usually around 1 to 10 percent of the loan amount, they are often cheaper than the fees charged on payday loans.
• Longer repayment terms: Repayment terms often range from one to seven years compared to the typical two- to four-week term of payday loans.
• Predictable monthly payments: You’ll make monthly payments with a fixed interest rate, meaning your payment remains the same throughout the life of the loan.
• No rollovers: A personal loan doesn’t have a rollover feature like payday loans. Once your payments are done, you have apply for a new one if needed.

Drawbacks of a payday loan consolidation

Before seeking out a personal loan to consolidate your payday loan debt, consider the potential drawbacks.

• Eligibility: You may not be able to qualify for a debt consolidation loan if you have limited income or a low credit score.
• Loan amount minimums may be too high: Many personal loan lenders set a minimum $1,000 loan amount. However, you can pay the balance down without penalty if you don’t need the extra money.
• May be a bandaid for bigger financial issues: The ease of getting personal loans may make them an easy path to new cycles of debt.

How to consolidate payday loans

The payday loan consolidation steps are similar to applying for any type of loan. However, you’ll need to act quickly if you want the loan paid off before your next paycheck.

1. Start the shopping process well before your next payday loan payback is scheduled. It may take a day or two before your funds are received after you sign papers.
2. Contact your payday lender and ask about their payoff requirements
3. Shop around for a lender that offers debt consolidation loans or bad credit personal loans.
4. Prequalify with at least three lenders to avoid damaging your credit.
5. Select the lender with the lowest costs and APR.
6. Apply with the lender and provide any documents they request (usually paystubs, ID and bank information).
7. Receive your funds, and pay off your payday loan balance as quickly as possible.

Alternatives to payday loan debt consolidation

If a personal loan for consolidation isn’t a good fit, but you want to avoid another payday loan rollover, there are some other options available.

Take a cash advance on your credit card

Most credit cards allow you to advance some of your available credit as cash. A credit card cash advance can be expensive, requiring an APR and sometimes fees based on a percentage of the amount of cash you need. However, you’ll have a minimum payment option that may relieve the pressure of repaying the entire payday loan balance (plus fees) every two weeks.

Meet with a credit counselor

If you’re taking out payday loans because you’re struggling to pay multiple debts such as credit cards, car loans and buy now, pay later loans, it may be time to consider some type of debt relief. Your local credit counseling agencies may suggest a debt management plan (DMP). They may be able to help you negotiate better terms on other loans so you don’t have to keep extending payday loans.

Consider debt relief programs

If you have at least $7,500 worth of other debt that you’re having trouble paying, it may be worth it to start contacting debt relief companies. They may be able to reduce your monthly payments and balance, leaving enough room in your budget to avoid taking out payday loans.

Consider bankruptcy

This is only recommended if your financial situation has become dire. If you’re taking out payday loans to pay basic bills like utilities and rent because your overall debt load is too much, filing for bankruptcy could give you relief. Chapter 7 bankruptcy is a legal process that involves legally discharging some or all of your unsecured debt. Your credit score will be damaged, and it may be tough to qualify for credit for a few years after the bankruptcy discharge.

Bottom line

The pressure of repaying payday loans with each paycheck can take its toll on your financial and even emotional well-being. If you’re caught in a payday loan rollover cycle, a debt consolidation loan can break the cycle with fast cash you can borrow with very little documentation. Always seek credit counseling if you’re at a point where you need payday loans to make ends meet. Never, ever pay a company an upfront fee, no matter how small the fee is, to get debt relief. Financial predators target financially distressed borrowers and make promises they can’t deliver. Don’t fall for it.