Payday loan consolidation is the process of paying off multiple short-term loan balances using one larger loan or line of credit, often combined with a set payment plan. The goal of payday loan consolidation is to reduce the cost of existing debt, simplify payments, and break the cycle of borrowing that payday loans can cause.
There are several different ways to consolidate payday loans. They include taking out a personal loan, drawing from a home equity loan or home equity line of credit, and moving the debts to a balance transfer credit card.
Below, you’ll find a thorough description of when and how to consolidate payday loans, along with some helpful alternative methods to handle payday loan debt.
When to Consolidate Payday Loans
You should consolidate payday loans if you’re in danger of having to renew them. Payday loans are meant to be paid back in a single payment after 2 to 4 weeks (once your next paycheck comes in). However, payday loan providers may allow extensions on the payoff period if you are unable to pay by the due date. In that case, you pay only the interest due on the loan, not the full balance. Your due date then gets moved forward a few weeks with a new set of interest charges tacked on.
As many as 80% of payday loan borrowers renew their loans at least once, according to the Consumer Financial Protection Bureau. That results in even more fees, on top of the already high cost of a single payday loan. So people who are in a situation where they would need to renew one or more payday loans should instead pursue refinancing/consolidation.
Unfortunately, payday loan consolidation doesn’t save you from having to shell out the original payday loan’s expensive fee. That could be a hefty charge, too, considering payday loans are known for fees that often equate to a 400%+ APR. But consolidation does make it so that you won’t have to renew the loan and pay another fee in the process. You’ll also be able to pay down the remaining balance at much less expensive rates.
How to Consolidate Payday Loans
- Consider multiple ways of consolidating and pick the best one for you. Credit cards offer the quickest consolidation if you already have one open, but personal loans are faster in terms of approval and funding of a new account. Unlike credit cards and personal loans, home equity loans and HELOCs require collateral and take a long time to get. But they are the cheapest overall.
- Get pre-qualified if possible. You may or may not be able to pre-qualify for a loan, depending on the consolidation method you pursue and the lenders you consider. But if you can, checking for pre-qualification will give you a good sense of what approval odds and interest rates to expect.
- Submit an application. You’ll need to include personal information (such as your name, address, and SSN) as well as financial information (such as income and housing payments).
- Get your funds, if approved. It could take anywhere from a few days to over a month to get your money, depending on how you decide to consolidate your payday loans.
- Pay off the payday loans. Once you receive the money, you can write a check or use cash to pay off your payday loan(s). Some loan providers may be able to pay off your old creditors directly. And if you do a balance transfer, the credit card company handles the payoff of the old debts.
Once you’ve consolidated your payday loans, you’ll owe the debt to the new lender at a much lower interest rate. This will make it easier to get debt-free sooner.
Now that you know the basic process for payday loan consolidation, it’s time to learn about the different ways to consolidate in detail.
Payday Loan Consolidation Options Compared
|Category||Personal Loan||Balance Transfer Card||Home Equity Loan||Home Equity Line of Credit (HELOC)|
|Typical APRs||6% to 36%||19%+ (0% intro on some cards)||4% to 8%||4% to 8%|
|Credit Score Required||585+ (660+ for no origination fee)||700+ for best offers||620+||620+|
|Approval/funding timeline||1 - 7 business days (usually)||14 - 24 business days||Often over a month||Often over a month|
|Collateral||None (usually)||None||Your house||Your house|
Now that you’re familiar with the basic approaches to payday loan consolidation, you’re ready to learn more about how each one works. We’ll cover the major methods in greater detail below.
Major Payday Loan Consolidation Options Explained
- Personal Loan - Personal loans can be used for just about any expense, and that includes consolidating payday loans. While unsecured personal loans require a score of 585+, there are also secured personal loans that consider applicants of all credit scores but require collateral.The first step to getting a personal loan is to check for pre-qualification. That way, you can see the rates you’re likely to get if approved and compare them to your current payday loan rates. Next, you’ll submit an application. If approved, you can use the personal loan to pay the payday loan off. Some personal loan providers may also be able to pay off your payday lender directly, rather than making you send a check yourself.
- Balance Transfer Credit Card - If your credit card issuer allows it, you could move a payday loan debt to a credit card through a balance transfer. You’ll then owe the debt to the credit card issuer instead. The best-case scenario would be to use a card with a 0% introductory APR on balance transfers. But you can do a balance transfer to most credit cards. Even the most expensive credit card APR will be far less costly than having an open payday loan.
- Home Equity Loan - Like a personal loan, a home equity loan can also be used for anything. But instead of being unsecured, the loan is secured by your home. That means that you face foreclosure if you cannot pay it back. Home equity loans usually provide cheaper APRs than personal loans or credit cards.
- Home Equity Line of Credit - A HELOC works just like a home equity loan, except instead of getting a lump sum you can borrow up to a set amount of money at any time, with no obligation. Their terms are very comparable to those on home equity loans.
Payday Loan Consolidation Benefits
There are several advantages to consolidating your payday loan debts. The most obvious is the fact that you can save money. Consolidating is far less expensive than renewing the payday loans and paying another round of enormous fees.
In addition, consolidating payday loans lets you pay them off over a longer period of time – months instead of only a few weeks. And if you consolidate multiple payday loans in one place, you’ll only have to worry about making one monthly payment.
Those are all reasons why so-called do-it-yourself payday loan consolidation can be an effective strategy. However, there are a few other debt solutions you may want to consider instead.
Alternatives to Payday Loan Consolidation
|Category||Debt Settlement||Debt Management||Credit Counseling|
|How it works||You pay a lump sum and have the rest of the loan forgiven||You set up a payment plan with the lender||A service helps you determine the best way to get rid of your debt|
|When it’s a good choice||After you’ve defaulted||When you can only afford to make smaller payments||When you want professional guidance and you can find a nonprofit organization|
|Further resources||Debt Settlement Explained||Debt Management Explained||Credit Counseling Explained|
The three main alternatives to payday loan consolidation function very differently and are most useful in unique situations.
Debt settlement: Tell your payday lender that you cannot afford to pay off the whole loan amount, but are willing to give them a lump sum in order to have the rest forgiven. The lender may accept debt settlement if they know that the alternative is you not paying at all, especially if it means they’ll have to go through the costly process of taking you to court.
Debt management: With payday loans, this entails making payments to a “payday loan consolidation company,” which then sends payments to your creditors after trying to negotiate a lower rate with them. Some of these companies are reputable while others are not. It’s best to pursue programs from non-profit organizations.
Credit counseling: There are some organizations that will give you advice on how to get rid of your payday loan debt for free. But others may charge you one-time or monthly fees. Steer clear of the ones that cost you money, considering you already have debt to pay off.