A payday loan is a high-cost, short-term loan that gives you a quick infusion of cash to tide you over until your next paycheck. If you’ve taken out several payday loans, you may wonder about your repayment options. Consolidating them, or taking out a single new loan to pay off the multiple high-interest ones, can be an option. For some people, it can be a path out of the debt cycle.
It’s important to understand how this process can work and its pros and cons.
Understanding Payday Loan Consolidation
Before you learn about payday loan consolidation, a brief note about these loans: They are typically used by people in urban areas who earn less than $40,000 per year. They can offer cash when needed for individuals who are falling behind on rent, utilities, or car payments.
Next, take a closer look at payday loans and how debt consolidation works.
Definition and How It Works
Payday loan consolidation means combining multiple existing payday loans under one new personal loan. In short, payday loan debt consolidation bands your loans together and allows you to repay them, typically at a lower interest rate and/or with a longer repayment period, usually one to seven years. In short, they can be a great alternative to repaying individual payday loans. While payday loans are usually very short-term, if you do the math, their annual percentage rate (APR) can be a shocking 391% or higher.
To get a payday loan consolidation loan, you can take the following steps:
1. Add up your payday loan balance, including fees.
2. Compare debt consolidation interest rates and loan terms, as well as personal loan requirements.
3. Apply for the loan that best suits your needs. Banks, credit unions, and online lenders may offer personal loans, which are typically unsecured loans, meaning you don’t need to provide collateral.
4. Once you are approved for a personal loan, you receive a lump sum payment to pay off your payday lenders. Or your lender may pay off your payday loans directly.
5. Make monthly payments on the personal loan until you pay it off completely. Setting up automatic payments so you don’t miss a payment can be a smart move.
Recommended: Payday Loan Requirements
Benefits of Consolidating Payday Loans
Here are the benefits of consolidating online payday loans and other forms of fast cash lending.
• New interest rate: Consolidating your payday loans means you can get a new, lower interest rate, well below than the triple-digit APRs that payday loans typically carry.
• Convenience: When you consolidate to a personal loan, you receive a regular monthly payment, which helps with a more predictable repayment schedule. You no longer need to juggle or worry about multiple payments.
• Lower fees: You may get charged an origination fee (between 1% and 10% of the loan amount) with a personal loan, but these charges are typically much less than the cost of carrying payday loans.
• Credit building: You might be able to build your credit score as you make regular, on-time monthly payments on your new personal loan. This can benefit you in the long run because it could give you opportunities to qualify for other loans at more favorable rates in the future.
Options for Payday Loan Consolidation
There are several options for payday loan consolidation, including debt consolidation loans, credit counseling services, and debt management plans.
Debt Consolidation Loans
You might want to consider a debt consolidation loan through a bank, a credit union, or an online lender. A debt consolidation loan is a type of loan that allows you to pool many of your loan payments into a single loan payment, making it easier for you to keep track of your payments. You might also find that these financial institutions offer significantly lower interest rates than payday loans. This can result in lower monthly costs, which can be very helpful for those who are living paycheck to paycheck.
Check for the interest rate on your new loan and the length of time you’ll repay your debt consolidation loan to ensure you get a comprehensive understanding of how much you’ll pay.
Credit Counseling Services
Credit counseling services are nonprofit organizations that help you manage your debts. They may offer educational materials and advice after reviewing your situation in a consultation, educate you about money management, help you develop a budget, and understand your credit report and scores.
Debt Management Plans
Credit counseling agencies and certified financial planners (CFPs) can help you develop a debt management plan. They will walk through your financial situation and discuss several options, including how to handle unsecured debts like credit cards and personal loans. Agencies may take management of your debts and contact creditors to find out if they can:
• Lower interest rates
• Lower monthly payments
• Stop late fees
They will let all your creditors know that they have taken over your accounts, which means your payments go to the agency instead of to your creditors.
A CFP can help you budget and explore options for restructuring and consolidating your debt.
Of course, you’ll pay fees for these professional services, so check with the agency or CFP how much you’ll pay. Be cautious about this decision, and check the reputation of an agency or financial professional carefully.
Qualifying for Payday Loan Consolidation
You can qualify for payday loan consolidation by meeting credit and income verification requirements and by understanding the fees and interest rates, repayment terms, and schedules.
Credit Requirements and Income Verification
Here are the usual requirements: You must be 18 or older and have a valid ID, such as a driver’s license or passport, to get a consolidation loan. You must also prove your income through a pay stub or other document and that you have an active bank or credit union account.
Fees and Interest Rates
Payday debt consolidation loans also come with fees and interest. As of August 2024, interest rates range from about 8.00% to 36.00%, depending on your creditworthiness, with an average of 12.36%. Origination fees are typically 1% to 10% of the loan amount.
Repayment Terms and Schedules
Along with a lower interest rate, you can also expect a longer repayment period with a payday consolidation loan compared to a standard payday loan. The term typically ranges from one to seven years with monthly payments.
Develop a Debt Repayment Strategy
Once you receive the money for the payday loan consolidation, you can pay off each payday lender (or the lender of your consolidation loan may do so for you). Then focus on paying off your personal loan. It’s vital to keep up on your personal loan payments, because missed payments can negatively affect your credit score.
Consider setting up automatic payments to avoid making missed payments, which also results in late fees. You might even get a discount (possibly between 0.25% and 0.50%) to set up automatic payments.
Create a Budget and Cutting Expenses
Creating a budget can help ensure you won’t need another payday loan. Use a budget app or try a method like the 50/30/20 budget rule to keep track of your expenses and to determine where you can cut back, whether it’s eating out, purchasing shoes or clothes, a gym membership you never use, or other items you don’t really need.
Doing this can help you make your payday loan consolidation payments and meet all your other debt obligations. Staying on top of your finances in this way can be a path to paying off debt quickly.
Prioritizing Debt Payments
Consider prioritizing debt repayment for your personal loan for consolidation and also on other loans that you owe. Taking care of all types of debt you owe can set you up for financial success. Tackling all types of debts can help you succeed over time, so keep track of what you owe on the following:
• Mortgage
• Student loans
• Auto loan
• Home equity loan
• Credit-builder loan
Recommended: Debt Payoff Guide
Build an Emergency Fund
Many experts recommend building an emergency fund that contains three to six months’ worth of basic expenses, to help protect against incurring future debts. An emergency fund can cover unexpected expenses or financial emergencies, such as a big car repair bill or a job loss situation. You might put the money for an emergency fund into a high-yield savings account to earn a competitive interest rate.
If you have an emergency in the future, you can dip into your emergency savings instead of taking out a payday loan.
Avoid Payday Loan Debt in the Future
Payday loans are risky, and if you need money, they should be your last resort. So, what are your alternatives? Here are some options.
Understand the Risks of Payday Loans
Payday loans may seem innocuous because you can get a quick infusion of cash without a credit check as long as you repay the loan balance on your next payday. Payday loans are small loans (usually $500 or less) that you must repay within 10 to 14 days of receiving the money. No biggie, right?
It’s true that you’ll get funds in your bank account quickly — usually within one business day. But the risks of payday loans occur when the lender assesses fees. Payday lenders don’t charge traditional interest rates — they usually charge a flat fee, between $10 and $30 for every $100 borrowed.
For example, a $500 loan could incur $150 in fees after the 10- to 14-day period. Some have interest rates of a whopping 600%.
Explore Alternative Financing Options
To avoid those kinds of interest rates, alternatives to payday loans include:
• Personal loans: Standard personal loans can offer funds at a significantly lower interest rate, if you qualify. Bad-credit personal loans can be obtained by those who have a low credit score, and these loans do not require collateral. Unfortunately, these come with higher interest rates, but they’re not as high as payday loans.
• Payday alternative loans: Payday alternative loans come from credit unions as an alternative to payday loans. Payday alternative loans (PALs) are divided into PALs I and PALs II. Credit unions offer $200 and $1,000 PALs I with a maximum 28.00% APR, with one- to six-month repayment terms. Credit unions offer PALs up to $2,000 and a maximum 28.00% APR, with one- to 12-month repayment terms.
• Home equity line of credit (HELOC): A HELOC is a type of loan where you borrow against your home’s equity. Your home serves as collateral, which means the bank could seize your home if you don’t repay your loan. You can think of a HELOC as similar to a credit card. After your lender approves the amount you can borrow, you have a certain amount of time to withdraw up to the limit within the draw period. When the draw period ends (say, after 10 years), you’ll enter a repayment period, such as 10 or 20 years. HELOCs typically have much lower interest rates than payday loans.
• Friend and family loans: Consider asking family and friends for a loan, but remember that not repaying a loan to family or friends can have lasting effects on your relationship.
• Credit card cash advance: Cash advances are short-term loans that allow you to access money from the financial institution that backs your credit card. You can borrow money against your line of credit, though it’s important to check the fees and APR. A credit card cash advance is usually an expensive option.
• Employer paycheck advances: Your employer may offer paycheck or payroll advances up to a limit, typically $1,000. You pay the loan back to your employer through future earned wages. Learn more about the repayment terms and details about the payment advance before you go that route.
• Peer-to-peer loans: Peer-to-peer loans take a crowdfunding approach to borrowing money. Money comes from individual private investors instead of institutions, typically in the form of unsecured personal loans, but note that due to the nature of these loans, the government doesn’t provide insurance for them.
• Second job or side hustle: A side hustle or second job can bring in more cash, if you have the time and resources to devote to it. This income stream could help you avoid taking out a payday loan.
Improving Financial Literacy
One of the best ways to improve your understanding and management of your money is to learn as much as you can about it. Developing financial literacy can help you make informed decisions about how to save money for emergencies, avoid debt, spend and budget wisely, and more. This, in turn, can help you sidestep payday loans.
The Takeaway
If you’ve taken out payday loans, you may wonder if consolidating payday loans makes sense. Taking out a single personal loan can help you replace multiple high-interest loans with a single, lower-interest one. This can allow you to reduce the amount of interest you’ll pay over time and take better control of your finances. Other types of loans may also be available to help you avoid payday loans. Educate yourself about all of your options so you can choose the best path forward.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.
FAQ
Can I consolidate payday loans with bad credit?
You may be able to get a payday consolidation loan with bad credit, but the interest rate may be higher than what you’d find with a higher credit score. Check with lenders to see whether you qualify for payday loan consolidation and at what interest rate.
What happens if I miss payments on a consolidated loan?
When you opt for a payday loan consolidation, your responsibility is to repay your loans. If you miss payments on a loan consolidation, you will likely incur late fees and could face a negative impact on your credit score. Keep making on-time, regular payments so your credit score doesn’t take a dip.
How long does payday loan consolidation take?
You can typically receive a personal loan fairly quickly, and the repayment term is usually between one and seven years.
Photo credit: iStock/tsingha25
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