Payday Loan Consolidation: How To Break the Payday Loan Cycle

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Payday loan consolidation means opening a personal loan to pay off multiple high-interest payday loans. This can lower your monthly out-of pocket and save you a lot of money in interest payments.

Here’s a look at this extremely helpful type of personal loan so you can decide if it’s right for you.

How Does Payday Loan Consolidation Work?

Payday loan consolidation works the same as any personal consolidation loan: You’re combining several debts into one loan. Instead of struggling to meet minimum payments on multiple payday loans, you’ll use your consolidation loan to pay those other lenders back — eliminating all monthly installments except your new consolidation loan payment.

It may seem counterintuitive to open another loan when you’re already struggling with other loans. But a consolidation loan reduces the number of loans you have. 

A Debt Management Plan May Offer an Alternative

If you’re struggling to be approved for a personal loan to consolidate your payday loans, a debt management plan (DMP) may be an answer to your problem. DMPs are typically offered through nonprofits and involve credit counseling to help you weigh all your options.

If you decide that a DMP is the way to go, the agency may work with your lenders to negotiate your debt on your behalf. Your balances will then be rolled into one loan with a more manageable monthly installment.

Step-by-Step: How To Consolidate Payday Loans

1. List all payday loan balances: Take stock of all your current, active loans.
2. Choose your consolidation method: Select a personal loan if you can qualify for it — otherwise, consider a DMP.
3. Shop for the best loan for your situation: Ideally, your loan will be large enough to zero out your other loans. You’ll also want to find a term length that results in affordable minimum payments.
4. Apply for your loan: Gather the relevant documents and info — you may need to provide paystubs, ID, etc., and then fill out and formally submit your application.
5. Stay current on your new loan: You now have a more reasonable monthly payment. Make your payment on-time and in-full each month, and you’ll build your credit score.

Benefits of Payday Loan Consolidation

A payday loan consolidation will benefit you in a few ways:

• You’ll roll all your current minimum payments into one monthly installment.
• You’ll likely benefit from considerably lower interest
• If you’re not current on your payday loans, paying them off with a new loan will halt the lender calls.

If you’re juggling multiple payday loans, you’re likely hemorrhaging money in monthly minimum payments. Even worse, payday loans are notorious for charging predatory interest rates — sometimes up to 400% APR — meaning those minimum payments are barely making a dent in your principal. It’s an easy way to get fast cash, but ultimately it may cost you exponentially more than you borrow.

Again, faithfully making your monthly personal loan payment will help build your credit. Banks and credit unions like to see on-time payment history. Payday loans generally don’t report to credit bureaus, so on-time payments for those are of no value to your credit health.

Risks and Things To Watch Out For

If you’re already in a vicious payday loan cycle, you may be prone to grab at anything resembling a lifeline. Scam companies are on the prowl for just such a customer. Beware of questionable loan companies promising to solve your problem. This includes for-profit debt relief companies.

Lenders targeted at subprime customers often charge hidden fees or exorbitant interest rates. You’re already getting that treatment from payday loan companies — you don’t want to make just a lateral move.

How To Choose a Payday Loan Consolidation Company

Fortunately, avoiding unsavory lenders isn’t difficult. Here are some steps you can take to avoid mishaps:

• Look for accreditation: If you’re working with a debt relief company on a DMP, for example, make sure you find one that’s not-for-profit. Take a look at the National Foundation for Credit Counseling (NFCC) or the Financial Counseling Association of America (FCAA) for good leads.
• Do some quick comparisons: Whether you’re leaning towards a personal loan or a DMP, compare the fees and plan details of each. Also, check their reputations on sites like the Better Business Bureau (BBB).
• Request terms in writing: If you’re working with a legitimate company, they should have all expectations in writing before you agree. This includes repayment expectations, terms, fees, etc.

Is Payday Loan Consolidation Right for You?

Take a look at the below circumstances to quickly answer whether a payday loan consolidation is right for you.

When It Makes Sense

• You have more than one payday loan.
• You’re struggling to make multiple monthly payments.
• You want to lower your loan APR.
• You’re stuck reborrowing to pay off older loans.
• You want to stop payday lender calls and fees.
• You want a plan with a clear end date.

When It Might Not Be the Best Fit

• You can pay off your payday loans in full within a month.
• You only have one payday loan with low fees.
• You don’t qualify for a personal loan and you don’t want to work with a credit counselor.
• You’re looking for quick cash instead of a long-term solution.

Payday Loan Consolidation Alternatives to Consider

Personal loans and DMPs aren’t your only option when it comes to payday loan consolidation. You can also consider the following:

• Initiate a balance transfer with a credit card offering 0% intro APR for a fixed amount of time
• Borrow money from family or friends with a repayment plan 
• Ask your lenders for an extended payment plan — some states will require payday lenders to provide this to struggling borrowers.
• Seek local assistance or hardship grants, from government programs to state welfare programs

Final Takeaway: Is Payday Loan Consolidation Your Best Move?

A payday loan consolidation is almost certainly a good move for anyone struggling to pay back more than one payday loan.

If you can qualify, you’ll immediately benefit from lower interest rates and a lower monthly payment. It’s a powerful way to regain control of your debt and escape the trap that payday lenders tend to set with often predatory terms.

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