Payday Loan Consolidation: What Are My Best Options?

Payday loans are expensive short-term forms of unsecured debt that trap you if you can’t pay them off immediately. Payday loan consolidation could help you escape that trap.

This article explains payday loans and how they could harm your finances. It also describes types of payday loan debt relief, including payday loan consolidation. 

What Is a Payday Loan?

The idea behind payday loans is that they work like an advance on your next paycheck—with a lot of extra fees. 

That means they are very short-term loans designed to be repaid on payday. They usually don’t require a credit check, but you do need a job and a checking account. According to the Consumer Financial Protection Bureau (CFPB), payday loans are normally for amounts of $500 or less. 

They are often offered by specialized institutions and are also available online. These are not traditional lenders like banks or credit unions. Instead, they are businesses catering to consumers with no credit or bad credit, who many traditional lenders ignore.

Payday lenders profit from dealing with high-risk borrowers in two ways. First, they secure a means of repayment upfront. Second, they charge a relatively large fee for making short-term loans. Payday loans are an extremely expensive form of borrowing; in many cases, the APR (annual percentage rate) exceeds 300%!

Payday loan lenders get repaid by having you write a post-dated check for the full amount of the loan plus fees. The payday loan lenders then cash that check on your next payday to automatically collect their money. 

Or, instead of a check, the lender might get authorization to withdraw the amount owed from your bank account electronically. However repayment is handled, there is a big fee on top of the amount you borrowed. That fee is how payday lenders make their money. 

Problems with Payday Loans

If payday loans help people with a poor credit record get access to loans, what’s the problem?

The main problem is cost. 

Because payday loans have such short terms, lenders take a flat fee rather than a percentage interest rate. According to the CFPB, payday lenders typically charge between $10 and $30 for every $100 loan. A $15 fee is common.

A $15 fee to borrow $100 for two weeks equals an APR of nearly 400%. What makes that high annual rate especially relevant is that borrowers often find themselves taking multiple payday loans and renewing them over and over.

Each time borrowers renew, they pay a fresh loan fee. In effect, they keep borrowing the same amount and pay another fee every time. If they do this for a year, it would cost $390 to borrow $100—plus the original $100 principal loan amount.

Again, that comes to an annual interest rate of nearly 400%. To put that in perspective, the average interest rate charged on credit cards is around 21%, according to the Federal Reserve Bank of St. Louis. 

The extreme cost is why some states cap the size of the fee payday lenders can charge. Other states ban this type of loan altogether.

What Is Payday Loan Consolidation?  

A $15 fee here or there could be manageable. But what if you can't repay the loan in full when payday comes? For payday loan borrowers who have to continually roll over their payday loans because they can’t afford to repay the principal, these fees can add up to a lot of money. 

Of course, paying those high fees over and over makes it hard to ever pay back the original amount owed. That’s how payday loans can quickly turn into a cycle of high fees and continual debt. 

Payday loan relief could break that cycle. 

Payday loan consolidation involves paying off expensive payday loans with an installment loan at a lower interest rate. Here's how that could help:

• By replacing multiple payments with a single monthly installment payment, borrowers have fewer debts to track. 

• A payday debt consolidation loan could save you money if the interest rate on the new loan is lower than the payday loan.

• A debt consolidation loan could offer a lower monthly payment and more time to pay off the loan balance.

How Does Payday Loan Consolidation Work?

Payday loans are ideal targets for loan consolidation because their interest rates are so high. If you can consolidate payday loans with a personal loan, it is likely to have a much lower interest rate. 

Besides saving you money, a personal loan offers a payment schedule designed to pay the loan off over time. That breaks the cycle of rolling over payday loans. 

You use the personal loan to pay off your payday loan debt and any other debts with higher interest rates. If you have trouble qualifying for an unsecured personal loan with a low interest rate, consider applying for a secured loan. 

Eligibility Requirements for Payday Loan Consolidation

Anybody who can qualify for a loan is potentially eligible for payday loan consolidation. Here are some of the things you'll need to qualify for a loan:

• A government-issued ID.

• An active bank account.

• Proof of a steady income large enough to make your new loan payments. This proof can take the form of pay stubs, a recent W-2 tax form, or bank statements showing the regular receipt of wage payments.

• A fair credit score. There is no hard-and-fast limit to what credit score is necessary for credit. While some traditional lenders may require at least a near-prime credit score (620 or better), there are plenty of personal loans and credit cards you could get with lower scores. A lower score may affect your ability to get a good interest rate. However, given the high cost of payday loans, you don't need to get a great interest rate to lower your interest with a consolidation loan.

• A reasonable debt-to-income (DTI) ratio. As with credit scores, there's no hard-and-fast rule on this. A DTI ratio below 36% is ideal, but a DTI around 43% may still be acceptable. The DTI ratio you need may depend on your other qualifications. The stronger those are, the higher a DTI ratio you may get approved with. 

Taking stock of these qualifications should give you some sense of what your strengths and weaknesses are. That can give you a chance to work on the weaknesses to improve your chances of approval.

How to Consolidate Payday Loans (Step by Step)

Follow these steps to consolidate payments to payday lenders. 

Step 1: Add up your payday loan balances

Start by calculating the total amount you owe across all your payday loans. This will give you a clear picture of your debt and help you figure out how much you need to consolidate.

Step 2: Shop around for the best loan

Next, look for debt consolidation loans that offer favorable terms. Compare interest rates, repayment periods, and any fees. It's important to note that loan origination fees could be as high as 10%. Balance transfer fees on credit cards may be as high as 5%. 

Look for a loan that has better terms than your current payday loans. That means adding up the total cost of repayment, including interest and fees.

Step 3: Prequalify

Many lenders allow you to prequalify for a loan without affecting your credit score. This is done with what's known as a soft credit check. 

Going through prequalification before applying for a loan could let you see your chances of getting approved. Plus, it should also give you an idea of the loan amounts and interest rates you might qualify for. This will help you make an informed decision about whether payday loan consolidation is worth it.

Step 4: Apply for the loan and receive funds

Once you’ve found the best loan option, complete the application process. Be ready to provide all required documentation and information. If approved, the lender will disburse the loan funds to you usually within a few business days.

Step 5: Pay off lenders and begin repayment on your consolidation loan

Use the loan funds to pay off all your existing payday loans. Then, focus on repaying your new consolidation loan according to the agreed terms. 

Setting up automatic payments could help ensure you don’t miss any payments, making it easier to stay on track. Some lenders may even offer a small rate discount if you set up automatic payments for their loans. That means they can both make your life easier and save you money!

Follow these steps. You can take control of your payday loan debt and move toward a more manageable financial future.

Building Your Debt Repayment Strategy

Paying off your existing debts is just the start of successful loan consolidation. Once you've done that, you need a plan to follow through. Here are some tips for getting your finances on more solid ground:

• Make a realistic budget that includes your new loan payments—and doesn't rely on further borrowing.

• Gradually put money aside to create an emergency fund. This could help you avoid having to borrow every time an unexpected expense comes up.

• Put any extra money towards paying down high-interest debt. This will give your payments the most bang for the buck. 

• Coordinate automatic payments with the timing of your paydays. That helps make sure there is money in your account to cover those payments.

Debt consolidation could be a solution to the problem of high-cost debt. Your long-term goal should be to avoid that problem in the future. The above steps should help with that. 

Pros and Cons of Payday Loan Consolidation

Loan consolidation can be a helpful tool if it is used correctly. Like any other financial tool, it has its pros and cons. 

Understand the pitfalls of a debt consolidation loan before applying. Here are some advantages and disadvantages of payday loan consolidation. 

Advantages

• Personal loans generally cost a lot less than payday loans. So, more of your future paychecks can go toward paying off what you owe instead of toward an endless string of loan renewal fees.

• A personal loan provides a clear repayment schedule, instead of drawing you into an open-ended cycle of borrowing.

• A traditional lender is more likely than a payday lender to report your payments to a credit bureau. That means a personal loan could help you improve your credit record if you keep up with the payments. 

Disadvantages 

• If you have poor credit, it is harder to get a personal loan. You may have to add a co-signer or find collateral for a secured loan.

• Personal loans aren't without costs. There may be a combination of fees and interest charges involved, so be sure to add up what the total cost would be before agreeing to any loan.

Even for borrowers who don’t have great credit, a personal loan can be a much cheaper option than payday loans. That makes it well worth shopping around for a lender who will give you the right loan to consolidate your existing debts. 

Avoid ads for “personal loans with no credit check,” however. Those are just sneaky ads for more payday loans. Ditto for auto title loans—they are just expensive traps secured by your car.

Don’t go into a new loan just hoping everything will work out. Once you see what the repayment schedule will be, create a budget to make sure you’ll be able to make the payments. 

When Payday Loan Consolidation is a Good Idea

Learn more about choosing consolidation for your payday loans.  

Meet Sarah: Struggling with payday loans

Sarah is a 32-year-old single mother working full-time as a teacher's aide. Like many Americans, Sarah sometimes struggles to get bills paid and has turned to payday loans to cover situations like vehicle repairs and medical bills for her child. 

While the payday loans were there for her in emergency situations, they carry a high cost. After paying loan fees and an extremely high interest rate, Sarah sometimes feels as though she was in a better position before taking out payday loans. Here's a breakdown of what Sarah's dealing with:

• Multiple payday loans: Sarah currently has three outstanding payday loans from three different lenders. To make matters more confusing, each loan has a different due date, making it difficult for this busy mother to keep track of payments. 

• High interest rates: The interest rates on Sarah's payday loans range from 300% to 400% APR, meaning her interest charges are bigger than her original loan amount. 

• Stable income but poor credit history: Sarah has been in the same job for several years and earns a steady income. However, her credit score has been damaged by missed loan payments. It's Sarah's credit score that makes it difficult to land a loan from her local bank or credit union and the primary reason why she continues to borrow from payday lenders. 

• Difficulty keeping up with payments: Managing three different loans with different due dates makes it easy for a loan payment to slip through the cracks while Sarah is busy working and raising her child. She often struggles to pay her loan payments on time, which leads to fees and penalties she can't afford. 

• Aggressive collection efforts: Rarely a day goes by without Sarah receiving a call or letter from one of the payday lenders demanding payment. On top of the other everyday stress Sarah experiences, she must deal with debt collectors. 

• Caught in a cycle of debt: Due to the high interest rates she's paying on the payday loans, Sarah finds herself trapped in the cycle of taking out a new loan to pay off the old. She wonders if she'll ever find her way out of the payday loan debt trap. 

Sarah considers payday loan consolidation

Sarah hears about debt consolidation and wonders if it will work for her. She decides to give it a shot. Here's how the process works for her: 

• Add up payday loan balances: Sarah does the math and realizes she owes $3,000 between the three loans. 

• Shop around for the best loan: Sarah knows there are different debt consolidation options available and so she researches them. Since she has poor credit, she realizes that she will need to find a lender willing to work with borrowers with low credit scores. Fortunately, she finds a lender willing to offer a consolidation loan with a 35% APR. A 35% APR is nothing to celebrate, but it's much lower than the 300% to 400% APR she's been stuck paying. 

• Prequalify for the loan: Sarah prequalifies for the consolidation loan. Prequalifying lets her estimate her loan terms without dinging her credit score. The lender offers her a loan that will cover all three of her current payday loan balances. 

• Apply for the loan and receive funds: Sarah completes the application. She provides the needed documents as requested by the lender and is approved for the loan. The funds are disbursed directly into Sarah's checking account. 

• Pay off lenders then start repaying: Sarah immediately uses the funds to pay off each of the payday loans. Instead of three different payments, Sarah now makes a single monthly payment to the lender. Better yet, after making 12 monthly payments, Sarah has made her way out of the debt cycle.  

The outcome of Sarah’s decision

• Reduced stress: The constant calls and letters from debt collectors stop, allowing Sarah to relax and enjoy her life.  

• Lower interest costs: By consolidating her payday loans into a single loan with a lower interest rate, Sarah saves a bundle on interest payments. 

• Simplified finances: Now that Sarah has only one loan to manage, it's easier for her to track payments and stick with a budget. 

• Improved credit score: By making consistent, on-time payments on the consolidation loan, Sarah's credit score improves. 

By consolidating her payday loans, Sarah was able to manage her monthly payments, improve her credit score, and escape a cycle of debt that once kept her bogged down.

Alternatives to Payday Loan Consolidation

People who have had to use payday loans often can't qualify for traditional forms of credit. If you're unable to get a consolidation loan, there could be other alternatives available.

Advances on pay

A growing number of employers are allowing employees to access money they've earned before payday. The money is then taken out of their next paycheck.

Even if your employer doesn't offer this service, there are financial apps that do. They can link directly to your account or even your employer's payroll department. That way they automatically recoup money that's been advanced to you.

You have to sign up for these apps in advance—you can't typically use them to access money on short notice.

There are generally fees for this kind of service. However, those fees may be less than the high cost of payroll loans. Try getting an advance on your pay as an alternative to repeatedly rolling over payday loans to make ends meet.

Extra earnings

Another way to make ends meet is to try to earn a little extra. Ask to work extra hours at your employer, or find a side hustle. 

Even a few hours a week could make all the difference. Plus, you don't have to keep up this schedule forever. Putting in some extra work could help you get out of debt. Once you've eliminated debt payments, it will be easier to live within your means.

Debt management plan

Debt management plans (DMPs) are offered by credit counseling firms; a credit counselor sets up your debt management plan and you make a single monthly payment. Your counselor distributes that payment among your creditors. Credit counseling can also help you with budgeting, and your counselor may be able to get you better repayment terms and other payday loan help.

In a debt management program, a credit counselor can: 

• Help you organize your payments

• Negotiate more favorable repayment terms from your existing creditors

• Help you find more cost-effective alternatives to your current debts

There is likely to be a fee for this service. However, that fee may be well worth it if it helps you break your dependence on payday lenders. 

Debt settlement

Debt settlement through a debt relief program goes a step further than debt management. It involves negotiating with creditors to reduce the amount you owe. 

Getting creditors to agree to this is difficult, but they may be willing if they are convinced you won’t be able to pay the full amount of your debts. In that case, accepting a partial payment upfront might be better for them than a long, drawn-out process with an uncertain outcome.

One drawback of debt settlement is that it might involve stopping payments to creditors while you negotiate, which creates an unfavorable record on your credit report. Missed payments can stay on your credit report for up to seven years.

However, if you’re already struggling to repay creditors, your credit score has likely already been damaged. And you could start rebuilding your credit after getting rid of your debt.  

There may also be costs involved. If you hire a debt relief company, you generally have to pay a percentage of the reduced debt as a fee for the debt settlement service. Also, debt written off may be viewed by the IRS as taxable income—the IRS has an insolvency worksheet that can tell you if the forgiven debt would be taxable income.

Bankruptcy

Bankruptcy is a legal process in which a judge dictates how you will pay your unsecured debts. With Chapter 7 bankruptcy, you surrender your non-exempt assets in exchange for having unsecured debt wiped away. With a Chapter 13 bankruptcy, you have to pay some or all of your included debt over three to five years by making a monthly payment to the bankruptcy court.

On the plus side, bankruptcy gets debt collectors off your back and could help you become debt-free. However, it's not without drawbacks. 

You may not be eligible for Chapter 7 if you make too much money. Also, bankruptcy filings become part of the public record. Filing bankruptcy could even make you ineligible for certain careers in the financial sector. Also, bankruptcy can stay on your credit history for up to 10 years.