Payday loans are taken out by an estimated 12 million Americans each year. Payday loans are among the costlier ways to borrow money, which many people are unaware of. A payday loan’s annual percentage rate (APR) can easily approach 300 percent, which is enormous when ConsolidationNow compared to the average credit card APR of around 16 percent.
When borrowers can’t make their payments, they prolong their initial loan or take out another payday loan to pay it off. They might become locked in a seemingly unending cycle of debt.
If you’ve gotten yourself into a payday loan debt rut, you might want to consider a payday consolidation loan. A payday consolidation loan could help you get out of this financial trap and avoid paying exorbitant payday loan interest.
What Is Payday Loan Consolidation?
Payday loans may appear to answer short-term financial problems, but they can quickly spiral into long-term debt. Consolidating your payday loans is one possible answer to the weight of payday loan debt. A debt consolidation loan combines your high-interest loan amounts into a single loan with a lower interest rate.
While a conventional payday loan needs to be paid off in a few weeks, many borrowers cannot do so. Payday loans are usually prolonged or reissued, so they can take months to pay off instead of a few weeks, adding to the borrower’s debt.
Assume this scenario. You borrow $300 from a payday lender for two weeks, and the lender charges you $50 in finance charges. The APR is equivalent to 434 percent if the loan is paid off in two weeks. If you can’t pay off the debt in two weeks, the lender may extend the deadline, but you’ll have to pay an additional cost. If you take out many payday loans, this debt cycle can continue. The average payday borrower takes out ten loans, racking up a mountain of interest and fees.
Consolidating your payday loan debt into a new loan puts an end to the debt cycle and allows you to repay your debt in fixed installments.
What is the Process of Payday Loan Consolidation?
The most significant benefit of payday loan consolidation is that it helps you save money by consolidating many high-interest loans into a single low-interest loan. This technique usually entails obtaining a personal loan from a bank, credit union, or another lender.
A personal loan usually has a repayment period of one to five years. According to the Federal Reserve, the average interest rate on a personal loan from a bank was 9.58 percent in May 2021. That’s a lot lower than a conventional payday loan’s interest rate.
Payday lenders usually do not run a credit check when borrowers ask for a loan. As a result, payday loans are popular with those who have bad credit and believe they won’t be able to qualify for a payday consolidation loan. However, this may not be the case.
Even if your credit score is low, you may be able to receive a consolidation loan. However, you will likely pay a higher interest rate than someone with a high score.
If you don’t qualify for a typical consolidation loan, a credit union may be able to help you with a payday alternative loan (PAL). You can consolidate and pay off high-interest payday loans using a PAL, with a maximum APR of 28 percent. Typically, credit unions give you up to six months to pay off a PAL.
Is Consolidating Payday Loans Harmful to My Credit?
A payday loan does not usually appear on your credit report, but a payday consolidation loan does. The consolidation loan has the potential to assist or destroy your credit, depending on how you manage it.
You might expect a tiny but temporary drop in your credit score when you first apply for a payday consolidation loan. The lender’s request to see your credit report or score is recorded as a “hard inquiry” on your credit report. Because the payday consolidation loan reduces the average age of your accounts, it may lower your credit score.
On the other hand, your scores may improve in the long run. Making timely payments on the consolidation loan, maintaining low balances on other credit accounts, and avoiding frivolous credit applications can all contribute to this rise. By combining your payday loans, you’ll be rid of their high-interest debt, saving you money and making your debt payments more manageable.
Debt Settlement vs. Payday Loan Consolidation
Consolidation may be a better alternative than debt settlement if you choose between payday loans and debt settlement. According to the National Federation for Credit Counseling, debt settlement can represent a “much greater” danger than debt consolidation. Why? Because debt settlement organizations demand high costs and the process can harm your credit, you should avoid it.
Debt settlement businesses negotiate on your behalf with your creditors to get you to pay less than you owe. However, there is no assurance that debt settlement will succeed, and you may end up worse off than before.
Debt settlement companies frequently refer to their services as “debt consolidation,” although the two are not synonymous. Debt settlement entails paying less than you owe on a debt; debt consolidation entails paying down your other loans as agreed and making one monthly “consolidated” loan payment until the new, lower-interest loan is paid off.
Reaching out to a nonprofit credit counselor if you’re drowning in payday loan debt can help you get your head above water. Nonprofit credit counselors provide free consultations. It’s a good idea to check your free Experian credit score and report before meeting with a credit counselor to see where your credit stands.