Payday lenders provide short-term, small-dollar loans to borrowers who need cash fast. Usually, you won't have to undergo a credit check to get funds, and your payment will be due in two to four weeks.
But many borrowers are unable to repay their payday loans in one two-to-four-week term. This can make an already expensive debt even costlier, especially if you have multiple payday loans. To get out of the payday loan cycle, consumers can consider payday loan consolidation.
What Is Payday Loan Consolidation?
When you consolidate payday loans, you combine multiple loans so that you can make one payment toward your debt, instead of several.
"I would define a payday loan consolidation as any method that will allow you to escape the payday loan cycle," says Omari Hall, learning experience designer at GreenPath Financial Wellness. The payday loan cycle, Hall says, is the experience of being forced to repay the full amount that you borrowed in a short amount of time with a large amount of interest.
You can consolidate payday loans by taking out a consolidation loan or by using a program for debt management or debt settlement, says Anissa Schultz, director of debt management at Credit Advisors Foundation.
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What Is the Best Way to Pursue Payday Loan Consolidation?
The appropriate choice depends on your situation, but you have options.
Debt Consolidation Loans
A debt consolidation loan can offer advantages including much lower interest rates for consumers who qualify.
"It is going to usually involve a credit check, so it does limit the availability for folks who have seriously impaired credit, but it is still probably the best option," says Martin Lynch, director of education at Cambridge Credit Counseling and president of the Financial Counseling Association of America. "I know replacing a loan with another loan doesn't sound appealing on the surface, but if you can benefit from a much better interest rate and only a moderately lengthened term, then you're better off."
Consolidation loans generally appear on your credit report, while payday loans do not. Paying back a consolidation loan on time and in full can help your credit score in the long run, Lynch says.
Still, there can be risks to taking out a new loan. For the rare payday loan borrower with a decent credit score, a consolidation loan is a good way to stop high interest rates, Schultz says. But borrowers who start to default on consolidation loans could find themselves returning to payday loan companies for funds to pay off their consolidation loans. "Lending is not a good way to get out of debt," Schultz says.
Debt Management Plans
Either working with a credit counselor in a debt management program or getting a bank loan can be a good place to start, depending on your situation, Hall says, though he notes that payday loan borrowers may have trouble qualifying for traditional loans.
"In many cases, the folks that find themselves in these payday loan cycles often don't have super excellent credit, such that a traditional banking loan would be available to them," Hall says. At the same time, banks may not offer loans for low balances, such as $1,000.
Instead, consumers can consider debt management. This process involves a financial counselor who will work to reach an agreement with your creditors, according to the National Foundation for Credit Counseling. Your credit report will include a note indicating your participation in a debt management plan, though the NFCC says this won't hurt your credit score, and completing a DMP should help your credit score in the long term.
A DMP could stop additional fees from accruing on your debt, among other benefits. You may pay a monthly maintenance fee to participate in the debt management program, but that amount will be cost-effective, especially for consumers accustomed to paying high interest rates, Hall says.
A debt settlement company can try to reach an agreement with your creditors to have you pay less than you owe. But debt settlement is not right for everyone, and you should be aware of the risks.
Settling a batch of payday loans signals to lenders that they will only get a portion of their money back if they lend to you, Lynch says. "That's why settlement is really a credit killer in that it alerts lenders to the thought that maybe we'll just get a portion of our money back. That's an awful signal to send." Other negatives include "extraordinarily high" settlement fees and a chance of being sued, Lynch says.
Can You Refinance a Personal Loan?
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What Are the Pros and Cons of Payday Loan Consolidation?
This section will focus on debt consolidation loans and DMPs. Keep in mind that pros and cons can vary depending on your situation and how you go about consolidating your payday loans.
Pros of consolidation loans:
- Lower interest rates. Payday loans can have annual percentage rates of 400% or higher, while traditional bank loans or online lenders can provide much lower rates.
- Different loan structure. A consolidation loan is an installment loan, so borrowers are not "sucked into this vicious cycle of 'Oh, I'm only paying off some of the interest, and you're going to roll my principle,' and then it just keeps rolling out of control and it seems like they can never get out of it," Schultz says.
- Longer terms. A consolidation loan can give you longer to pay off your debt than the two to four weeks you may have with a payday loan.
Cons of debt consolidation loans:
- You might not qualify. Consumers may not meet lender requirements for income, credit score and other factors. It's also possible that you won't be looking to borrow enough money to be eligible, depending on a lender's minimum loan amount.
- Usually requires a credit check. When you apply for a consolidation loan, the creditor will generally perform a hard inquiry on your credit report, which can lower your score. "Because they're looking to extend their finances, they're going to do a hard inquiry, and it's going to drop their credit score," Schultz says.
Pros of DMPs:
- May stop accounts from going to collections. Using a debt management program might help borrowers avoid hearing from debt collectors.
- May get borrowers better loan terms. It's possible that lenders will agree to lower borrowers' monthly payments and stop adding fees to the balance, for instance.
- Can help borrowers with other financial matters. Getting a DMP involves working with a nonprofit credit counselor, who can assist with other parts of your financial life, not just your payday loans.
Cons of DMPs:
- Lenders are not required to participate. While most payday lenders participate, "there's no mandate for payday loan companies to work with credit counseling organizations and their mutual clients, unfortunately," Schultz says.
- Lenders are not required to make concessions. Credit counselors "can't necessarily secure benefits from payday lenders," Lynch says, though payday lenders will almost always receive payments.
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What Are Other Options to Get Out of Payday Loan Debt?
Consolidation loans and DMPs are not the only ways to get out of payday loan debt. Borrowers might also consider options such as:
- No-cost extended payment plans. More than half of the states that permit payday loans also require payday lenders to offer no-cost extended payment plans, according to the Consumer Financial Protection Bureau. These plans vary by state, but they allow borrowers to extend their loan terms without paying any additional fees.
- Credit cards. The average APR for credit cards in the U.S. News database is 15.56% to 22.87%, so paying off payday loan debt with a credit card will also provide a lower interest rate. If you can get one, a 0% APR credit card lets you pay off your balance with no interest during an introductory period.
Consumers struggling with payday loan debt are not alone. "Falling into this debt cycle is not a thing that you should necessarily be ashamed of," Hall says, noting that in some communities there aren't a lot of other options. "A lot of my work is centered around the Black and brown community, the inner-city disenfranchised community, and it is a fact that these payday loan companies are far more prevalent in those communities than they would be in other more established communities or more supported communities."
And there are options to get out of debt. "It's not a situation where there are no options or no (ways) to escape," Hall says.