What is Payday Loan Consolidation?
If you turn to payday loans to meet short-term cash needs, the sky-high annual percentage rate (APR) and fees that come with these loans can trap you in a cycle of debt. If you don’t repay those payday loans right away, it can become much more difficult to afford them.
Payday loan consolidation could help you escape the debt cycle. Some lenders offer refinancing for this type of debt at a lower rate with more manageable repayment terms, especially if you’ve taken out multiple payday loans.
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What are payday loans?
A payday loan has very high interest rates (up to 400% APR), and you only have a few weeks to repay the money borrowed. Even if you pay the loan back on time, added fees still make it a very expensive way to borrow money. Cash-strapped consumers may not feel they have any other options to address short-term financial needs, but payday loans should be avoided if possible.
Payday loans have very short repayment periods; borrowed funds are usually due on your next payday. If you can’t repay the debt on time, you may have to borrow another payday loan to repay the first, along with extra fees and interest. According to the Consumer Financial Protection Bureau, 80% of all payday loans are rolled over or followed by a second loan within 14 days. It’s easy to get trapped, especially if you use payday loans to cover necessities like food or gas.
Many reputable lenders offer debt consolidation loans to package those payday debts into a single loan with a lower interest rate. Consolidating your debt with a personal loan could reduce your total borrowing cost and offer longer, more attainable repayment terms.
Common ways to consolidate payday loan debt
If you’ve borrowed more payday loans than you can afford to repay, you have options for consolidating that debt. While some payday lenders allow you to repay your debt with a balance transfer credit card, the most common options for consolidating payday loans are using a personal loan or a payday alternative loan.
| Personal loan | Payday Alternative Loan (PAL) | |
|---|---|---|
| Amount | Up to $100,000 | Up to $2,000 |
| APR | Fixed, commonly under 40% | Fixed, under 28% |
| Loan terms | 12 to 84 months | 1 to 12 months |
| Eligibility requirements | Must have qualifying credit to be approved | Must be a member of a participating credit union and have sufficient income |
| Funding timeline | Generally, less than a week | A few days |
Personal loan
Personal loans are a common way to consolidate debt, including payday loan debt. If you can qualify for a personal loan, you’ll be able to stretch the cost over a longer time period and pay much lower interest rates. With loan amounts commonly as high as $100,000, personal loans can cover a significant amount of debt.
Payday Alternative Loan (PAL)
If you’re a member of a federal credit union that offers payday alternative loans, you can apply for a short-term loan with an APR capped at 28%. You must be a credit union member for at least one month to qualify, and you’ll need to provide proof of income during the application process. Visit MyCreditUnion.gov for a list of credit unions near you.
How to consolidate payday loans
While the application process will vary by lender, these are common steps you’ll take when applying for a debt consolidation loan:
Assess your debts
For any kind of debt consolidation, you’ll first need to figure out how much money you owe. While some lenders require documentation of your debt as part of the loan application process, not all do. Either way, you should know how much you owe your creditors so you can repay them in full with a new consolidation loan.
Contact potential lenders
Before taking out a loan, research and contact potential lenders. Prequalification can help you figure out the interest rate and estimated monthly payments you may receive before officially applying. By filling out a single form with LendingTree, you may receive up to five loan offers from lenders.
Apply for the consolidation loan
Once you decide on a lender, you’ll apply for the loan. You’ll be required to provide your Social Security Number, proof of employment and possibly documentation related to your existing debt. Lenders will perform a hard credit check to assess your creditworthiness and make a loan decision.
Pay off your payday debt
If you’re approved for a loan, you can use the borrowed funds to pay off your existing debt. Some lenders will repay your old creditors on your behalf. Before you consider your debt fully repaid, confirm that you don’t owe any outstanding fees and that your debt balance is zero.
Pros and cons of payday loan consolidation
Payday debt consolidation might make sense for some debtors, but there are potential disadvantages to keep in mind.
| Pros | Cons |
|---|---|
Lower APRs and fees, reducing the total cost to borrow More favorable repayment terms Single monthly payment | Tougher eligibility criteria Minimum borrowing amounts Hard credit check required |
If you qualify for a debt consolidation loan, you’ll likely have a lower APR than on your high-interest payday loans. This can translate to a lower monthly payment and total debt amount, and you won’t have to manage several different loans.
Unfortunately, there are stricter eligibility requirements to meet than with payday loans. Borrowers with bad credit will have a harder time qualifying since they haven’t shown a track record of being able to repay their debts. If your credit scores could use some work, you can expect to pay a relatively high APR on a debt consolidation loan, but still less than the rates attached to payday loans.
Additionally, lenders have minimum borrowing amounts that may be more than you need to cover the repayment of your payday debt. Look for lenders that offer small loan amounts to find the right fit for your needs.
Alternatives to payday loans
Avoiding predatory payday loans in the first place is the safest option for your wallet. If you need cash quickly, these alternatives may be better than a payday loan.
- Payday Alternative Loan: Some credit unions offer a short-term loan product as an alternative to payday loans. You must already be a credit union member to get a PAL, and you can borrow up to $2,000.
- Personal loan: Instead of turning to a personal loan after payday loans have put you into debt, you could take out a personal loan to cover those cash needs in the first place. Personal loans have better interest rates but stricter credit requirements.
- Cash advance: If you need cash and have a credit card, a cash advance allows you to borrow against your credit line. Cash advances generally have higher interest rates than credit card payments, plus an additional fee, so proceed with caution with this form of borrowing.
- Negotiate debts: Creditors sometimes offer hardship options for borrowers experiencing financial difficulty. Instead of taking out a payday loan, check with your creditor to see if it will agree to a payment plan, reduce your monthly payments or settle your debts for less than what you owe.
Side hustle: Many people take on a side gig to help make ends meet. In fact, a 2022 LendingTree survey found that 44% of Americans report having a smaller, secondary job. From seasonal work to reselling items online, these Americans add $473 to their monthly income on average.