Payday Loan Consolidation

A payday loan can seem like a helping hand for those in quick need of cash to make ends meet. And given the number of payday loans taken out annually, that description fits millions of Americans looking for a quick resolution to a financial shortfall.

But any sense of relief payday loans provide is often illusory. The reality is that exorbitant transaction fees and repayment periods that seem to pass in the blink of an eye combine to strand borrowers in an ever-deepening sinkhole of debt.

Because payday loan amounts are relatively small compared to a car loan or mortgage, they might seem less onerous. Don’t be fooled. The amount owed two weeks hence (the next payday for many) is a snowball on its way to becoming an avalanche when people fail to pay the loan off on time.

Eighty percent of borrowers tracked over 10 months in a Consumer Financial Protection Bureau study rolled over or re-borrowed payday loans within 30 days of taking out the initial loan.

One option to escape the soul-crushing cycle of debt is loan consolidation. It allows borrowers to condense multiple high interest loans into a single loan at a lower rate and, possibly, help rebuild the poor credit scores that brought them to the bright flashing lights of payday loans in the first place.

“Payday loan consolidation can be a breath of fresh air, potentially lowering your interest rates, which often soar to around 400% with payday loans,” said certified financial planner Jeff Rose, a U.S. combat veteran and author of “Soldier of Finance.”

“However, a consolidated loan might come with fees and could extend your repayment period, meaning you might pay more in the long run. It’s all about weighing the potential savings against the costs.”

What Is Payday Loan Consolidation?

Payday loan consolidation is a form of debt consolidation combining a number of payday loans into a single loan, which is then paid off monthly at a fixed rate.

A typical payday loan borrower takes out as many as 10  loans, each adding to the pile of interest and fees, so you can appreciate the dire need to end a cycle of financial insanity.

Is Payday Loan Consolidation a Good Idea?

If you’re a repeat payday loan customer, consolidation as a “good alternative” is likely a relative term. You’re in a bind. There’s no magic carpet ride out of it. A “better alternative” should probably be the operative term and even that comes with some strings attached.

As is the case with any financial transaction, consolidation carries both benefits and drawbacks.

What is a “good” idea, is to make a list of positives and negatives before proceeding.

Pros

• Lower fees: Consolidating payday loans into a single personal loan can save you a significant amount of money depending on the interest rate (usually much lower) and the length of the repayment period.
• Longer repayment terms: Payday loans typically require payment in two weeks. Payday lenders know many borrowers won’t be able to pay back loans that quickly. Borrowers feel there’s no alternative except to roll over the amount owed into another payday loan with more fees attached. Loan consolidation offers a longer repayment period that greatly increases a borrower’s chances of paying back the loan in the specified term.
• Predictable monthly payments: You know how much is due every month with a consolidation loan as opposed to the roller coaster ride of payday loans.
• Improved credit: Making that monthly payment on time can actually help improve your credit score, especially if that score is already carrying more dings and dents than a demolition derby car.
• No rollovers: Payday loan rollovers are legal quicksand that should be avoided at all costs.

Cons

Taking out a personal loan to consolidate your payday loans is potentially a money saver but understand that this strategy might not work for everyone.

• Eligibility: If bad credit led you to take out a payday loan (or five payday loans), you’re likely not going to qualify for a low interest personal loan. Payday loan consolidation rates can be as high as 36% for those with poor credit.
• A temporary fix: If you’re in trouble on the payday loan front, chances are you’re carrying other debt, often high interest credit card debt. Consolidating payday loans is a start but not much more than that if you’re not smartly budgeting and especially if you’re piling up debt elsewhere.
• Long Repayment Periods: Consolidated loan repayment periods could stretch 60 months or more. As Rose points out, depending on your circumstances, you could end up paying more in interest fees through a longer repayment period.
• Possible collateral risk: “If the consolidation involves securing the loan with a home or car, borrowers risk losing those assets if they default on the consolidated loan,” Young Pham, a Project Manager with BizReport, said.

How To Consolidate Your Payday Loans

Taking stock of your debt is always the first step toward reining it in. Not keeping tabs, conversely, is frequently the root of financial trouble. There is a clear process to be followed in consolidating payday loan debt.

1. Calculate the total payday loan balance: You need to know the total balance owed and whether you can apply for a personal loan since many personal loans begin at $1,000.
2. Shop around: Your credit score will determine your interest rate. Credit unions might offer better terms to borrowers with lower credit scores than a traditional bank will.
3. Apply with the lender of choice: Yes, the dreaded application is a necessary step, and you will need documentation of income, identity, employment, your Social Security number, etc. But one positive is you can often do it online.
4. Receive the money: If you’re approved, you could see the loan amount within a week’s time, possibly even within a day or two.
5. Pay off lenders: Don’t find any other use for the loan amount. Not the vacation you can’t stop dreaming about. Not that new dress or suit. Getting payday loans paid off allows you to turn your attention to paying off the consolidated loan amount in a disciplined (once a month) manner.

It’s crucial when paying off any sizable debt to make a plan to stop the cycle once and for all. There’s nothing wrong with asking for help if need be.

“When you’re feeling swamped with debt, which nearly 80% of Americans are grappling with, reaching out to a nonprofit credit counseling agency can be a wise move,” Rose said. “They can offer guidance, help set up a budget, and sometimes find better terms with lenders, helping you find a way out of the debt maze.”

Payday Loan Consolidation vs. Debt Settlement

In loan consolidation, you are paying off lenders in full, then paying off that lower-interest loan in full over an extended repayment period.

Debt settlement most often involves a debt settlement company negotiating on your behalf to pay creditors less than you owe. There is no guarantee creditors will accept that offer and your credit score could be significantly affected for as long as seven years.

Does Payday Loan Consolidation Affect Your Credit Score?

Payday loan consolidation doesn’t affect your credit score nearly enough to rule it out as a strategy.

“It might actually help improve your credit score if it leads to consistent, timely payments,” Rose said. “But the initial credit check during the application might cause a slight dip, usually by a few points.”

Are Payday Loan Consolidation Companies Legitimate?

Payday loan consolidation is not unlike getting out from under a timeshare. It’s best in both cases to do your research on the companies offering those services to ensure the terms are spelled out and the particular company is in good standing.

“Unfortunately, many payday consolidation lenders exhibit the same unsavory behavior as payday lenders,” Thomas Brock, a certified financial advisor and contributor for Annuity.org said. “They take advantage of individuals trapped in a virtually inescapable financial trap.

“The safest way to escape the trap is to consolidate the debt via a personal loan offered by a reputable bank, credit union or online lender. While still very costly, this is the most economical way (to handle) debt.”

Alternatives to Payday Loan Consolidation

Borrowers who get saddled with payday loans they can’t keep up with often are in such a precarious position because they didn’t have a good enough credit rating to get a low interest loan from a bank or credit union in the first place.

There are other options worth exploring:

• Borrowing from family and friends: If you can get financial help that doesn’t carry a high interest rate or restrictive repayment period, you can save yourself money and lots of stress. But it’s imperative that the terms of the loan be spelled out and signed off on when you borrow from friends and family. If not, you risk losing a relationship through hard feelings when the two sides of a transaction have different expectations about repayment.
• Peer-to-Peer Lending: This option connects borrowers with individual investors. “While interest rates (in a P2P platform) can be higher for those with poor credit,” Pham said, “they may still be more favorable than payday loans.”
• Request an extended repayment period: Some states (unfortunately not all) require payday lenders to extend repayment periods without attaching additional fees in certain circumstances.
• File for bankruptcy: Depending on your situation, filing Chapter 7 bankruptcy could mean getting some of your debt discharged. But bankruptcy is a complicated process that could damage your credit score for 7-10 years. It’s best to seek professional advice before choosing this option.
• Start an emergency fund: Putting money away in an emergency fund won’t help pay off your outstanding payday loans today, but in the interest of long-range solvency, or at least making better financial decisions, it could certainly help the next time (or the time after) you need money for a shortfall.

Speak to a Nonprofit Credit Counselor

Nonprofit credit counseling can not only help borrowers deal with the immediate burden of payday loans but can provide broader financial guidance for people who are struggling with loans and credit card debt and living paycheck-to-paycheck.

Nonprofit credit counselors can review your finances and credit report, help you make a budget you can follow, provide bankruptcy counseling, or design a debt management plan in which counselors work with creditors to consolidate your debts into a single payment at a lower interest rate.

“Considering a debt management plan might be a good move,” Rose said. “Nonprofit credit counseling agencies can reduce rates by 0%-10% and formulate a plan to chip away at that debt without it spiraling further.”

The high borrowing costs of payday loans is often the equivalent of throwing a drowning man an anchor. Credit counseling, on the other hand, can be a life preserver.