What Is Payday Loan Consolidation? How To Get Out of Your Payday Loan
- Payday loan consolidation can replace a payday loan with a personal loan that may charge an APR of 36% or less instead of rates of up to 400%.
- With only one fixed monthly payment, that can help you escape the payday loan rollover cycle.
- Borrowers with bad credit can still qualify, but comparing multiple offers can help you find the lowest rate.
What is payday loan consolidation?
Payday loan consolidation means you pay off one or more payday loans with a new debt consolidation loan that carries a lower interest rate and a longer repayment term. Instead of juggling multiple short-term, high-cost loans, you make one monthly payment to a single lender.
While payday lenders charge rates of up to 400%, the best personal loan lenders charge rates below 36%. That difference in rates alone can mean paying hundreds of dollars less in interest on the same loan amount.
How much you could save by consolidating a $500 payday loan
If you can’t repay a payday loan in full, including the fees, by the time it’s due, you may have to renew or roll over the loan. Doing so significantly increases the cost of the loan, which is why using a personal loan to pay off a payday loan could be helpful.
| Payday loan, rolled over 6 months | Personal loan (consolidation) | |
|---|---|---|
| Loan amount | $500 | $500 |
| APR | 400% | 36% |
| Repayment term | 2-week cycles, renewed for 6 months | 1 year |
| Total interest/fees paid | About $975 | About $103 |
The math changes based on your loan amount, rate and payoff timeline, but the general pattern holds. The longer you roll over a payday loan, the greater the potential savings that replacing it with a personal loan may provide.
See LendingTree’s full guide on personal loans vs. payday loans.
Benefits of consolidating
- Save money with lower interest rates. A payday loan’s triple-digit rate works against you every time it’s renewed. A personal loan with a rate of 36% or lower stops that cycle of bleeding money. As the table above shows, it could mean the difference between paying $975 in fees and $103 in interest on the same $500 borrowed.
- Pay off your debt with more time. Payday loans come due in two to four weeks. Personal loans typically give you two to five years to repay, which spreads your balance into smaller, more manageable monthly payments. However, a long-term loan means you will pay more interest overall, so choose the shortest term with a payment amount you can comfortably afford.
- Escape the cycle of debt. A payday loan due in full in two weeks often forces a renewal, and each renewal adds another fee without reducing what you owe. A personal loan with a fixed monthly payment breaks that pattern; once it’s paid off, the debt is gone.
A LendingTree study on debt consolidation found that borrowers with a 760+ credit score could save $1,750 in interest and pay off $10,000 in debt six months faster by consolidating into a personal loan instead of carrying it on a high-rate credit card. Even borrowers with good, but not excellent, credit (680 to 719) saved $570 under the same scenario.
Payday loan consolidation works on the exact same math: replacing high-interest debt with a lower-rate personal loan; the savings will follow from the rate gap.
How to find payday loan consolidation options with LendingTree
- Check your credit. Know what to expect by checking your credit score for free with the LendingTree app. While you can get a debt consolidation loan with bad credit, the lender will charge you higher rates and may limit the amount of money you can borrow.
- Check your rates. Use the tool below to tell us how much debt you need to consolidate. Take two minutes to fill out the form, and we’ll send you offers from up to five lenders if you qualify.
- Compare your offers. Choose the offer with the lowest rates and best terms for your financial situation. You can use our personal loan calculator to help you decide which loan is best for you.
- Get your money. Once you’ve chosen a lender, you’ll formally apply and the lender will perform a hard credit check. If you qualify, the lender will send you a personal loan agreement. After you sign it, you’ll get your money.
- Pay off your loan. Use the money to pay off your payday loan. Then, you’ll start payments with your new lender.
Alternatives to payday loan consolidation
Consolidation works best if your income can support one predictable monthly payment and your credit qualifies you for a rate meaningfully lower than the rate on your payday loan.
However, if your debt-to-income ratio is high, your credit score is too low to qualify for savings or you have multiple payday loans and other unsecured debt, one of the following options may be a better alternative to consider:
- Credit counseling. A credit counselor will help you to manage your debt and create a debt management plan to pay it off.
- Debt settlement. With debt settlement, you’ll negotiate with your payday loan lender for lower monthly payments or debt forgiveness. You can ask for a settlement yourself or pay a company to do it. This option is best if you have poor credit and more debt than you can reasonably pay off. Learn more about debt settlement vs. debt consolidation.
- Bankruptcy. If you’ve tried all other options and can’t afford to pay off your debt, you can consider filing for bankruptcy. Doing so will affect your credit and you may have to sell your possessions, but bankruptcy will wipe out your debts.
How to borrow money without a payday loan
Personal loan from a reputable lender
There are few absolutes in personal finance, but it’s almost always better to choose a personal loan from a traditional lender than a payday loan. That’s because you’ll save a significant amount of money with lower rates. Here are some of the best alternative loans for the next time you get in a pickle:
- Bad credit loans: Best if you want to work with a credible, well-known lender that offers rates below 36% APR.
- Payday alternative loans: Best if you’re a member of a federal credit union (or can join one easily) that offers this type of loan capped at 28% APR.
- Quick loans: Best if you need money as soon as possible, since some lenders will send money the same day.
- Small loans: Best if you want to borrow $1,000 or less from a traditional lender.
Paycheck advance
Like payday loans, paycheck advance apps are designed to help you make ends meet between paychecks. Unlike payday loans, these companies don’t charge interest. However, you’ll pay optional fees to get your money faster.
Family loan
Borrowing money from family or friends can give you quick access to money, and you’ll likely pay lower interest rates (if any at all). Make sure to write up a personal loan agreement so that both sides are on the same page about interest rates, a repayment plan and what happens if you can’t make a payment.
Frequently asked questions
You can choose a DIY approach by consolidating your debts with a personal loan. Be sure to apply for a personal loan from a reputable lender that caps its interest rates at or below 36%, as this is the rate experts agree is the line between affordable and predatory. If you need expert help, a credit counselor can create a debt management plan for you.
A lower income doesn’t rule out consolidation, but it does limit how much money you’ll qualify to borrow and at what rate. Lenders look at your debt-to-income ratio, not just your paycheck, so a smaller loan with a shorter term may be easier to get approved for than one that fully covers your payday loan balance.
If your income can’t support even a modest monthly payment, credit counseling is often a better starting point since it’s free and doesn’t require taking on new debt.
Applying for a personal loan triggers a hard credit check, which can temporarily lower your score by a few points. Most personal loans report your on-time payments to the credit bureaus, something payday lenders typically don’t do, so consistent payments can help build your credit over time. Missing a payment on the new loan will hurt your score, the same as missing any other bill.
Learn more about how debt consolidation affects your credit score.
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