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Payday loans offer quick cash when you're in a financial bind, but they come with significant drawbacks.
These loans typically carry extremely high fees with APRs of nearly 400%. Plus, repayment is required within just two to four weeks after receiving the loan.
If you're struggling with multiple payday loans, our best consolidation loans could provide much-needed financial relief through lower interest rates, extended repayment periods, and manageable monthly payments.
This article will guide you through effective strategies to consolidate and eliminate your payday loan debt.
Key Insights
- Payday loans are typically small loans with short repayment terms and extremely high fees, which can make it easy to fall into a debt trap.
- Consolidate payday loans with a personal loan to pay off existing debts, then repay the new lender with fixed monthly payments. Other options include debt settlement, management plans, or credit cards.
- Consolidating your payday loans can help you reduce costs, shrink your payments, and pay your debts back over a longer period.
What Is Payday Loan Debt Consolidation?
- Combine loans into one payment: Payday loan debt consolidation combines multiple payday loans into a new debt with one monthly payment. A personal loan is one of the most effective methods for consolidating debt. You borrow from a lender, pay off your payday loans in full, and then repay the new loan over time with a single fixed monthly payment.
- Lower costs and extended terms: Personal loans offer much lower interest rates than typical payday loans. You can repay over 3-5 years rather than within weeks, with more manageable monthly payments instead of one large lump sum.
- Credit-building opportunity: Unlike payday loans, which typically don't report to credit bureaus, personal loans can help build your credit history through consistent on-time payments.
"This process usually involves the combination of many payday loans, all of which charge very high interest rates, into one single loan," says Cody Carlson, automotive and finance expert at CarFinanceToday. "Instead of paying several loans … you would now be required to make one fixed monthly payment … often at reduced rates."
How to Consolidate Payday Loans Step-by-Step
Follow these steps to consolidate your payday loans with a personal loan:
1. Add Up Your Payday Loans
Create a list of all your payday loans, including lender names, balances, and due dates. Calculate the total amount needed to borrow when shopping for a debt consolidation loan. Confirm you meet lenders' minimum debt requirements for personal loans.
2. Shop Around for the Right Lender
Look for debt consolidation lenders offering loans in your required amount and verify their credit score requirements. Lenders will evaluate your income and debt-to-income ratio during approval.
Compare APR ranges on multiple lenders' websites—better credit scores typically qualify for lower interest rates. Use pre-qualification tools to compare offers without affecting your credit score.
3. Apply for a Loan
Submit your loan application online, by phone, or in-branch once you've selected a lender. Prepare these documents:
- Proof of identity: Driver's license, birth certificate, passport, or Social Security card
- Proof of income: Paycheck stubs, 1099s, W-2s, or tax documents
- Proof of address: Utility bill, lease/mortgage statement showing your name and address
- Financial information: Bank account and routing numbers for direct deposit
"Lenders will ask you to submit many documents [including] proof of your income, verification of your employment, bank statements, and a credit check. Some may ask for a list of existing debts to evaluate your financial health," says Carlson.
4. Receive Funding and Pay Off the Payday Loans
After approval, accept the offer to receive funds via direct deposit or paper check, often as soon as the next business day. Use these funds to fully repay your payday loans, or some lenders may pay your payday lenders directly.
5. Pay Off Your Debt Consolidation Loan
Make full, on-time monthly payments throughout your loan term. Personal loans typically have 3-5 year repayment periods versus 2-4 weeks for payday loans. Check for early repayment penalties if you plan to pay ahead of schedule.
Consistent payments can improve your credit score over time, potentially eliminating the need for future payday loans.
Alternatives to Personal Loans for Payday Debt Consolidation
Want to look at other options beyond personal loans? Here are some alternatives for payday debt consolidation:
- Debt settlement services: These companies negotiate with payday lenders to accept lower payoff amounts. If successful, you'll pay the settlement company (who typically charges 15-25% of your debt) over several years until the negotiated amount is fully paid.
- Debt management plans: Nonprofit credit counseling agencies offer DMPs where they negotiate better terms, including lower interest rates and extended repayment schedules. You make one monthly payment to the agency until the debts are paid off, usually over several years.
- Credit cards: Though not ideal due to their own high interest rates, credit cards generally charge less than payday loans' exorbitant fees. "There are also cases where balance transfer credit cards can help consolidate payday loan debt at lower rates," says Carlson.
Bottom Line
Breaking free from the payday loan cycle is possible through consolidation. By combining your high-interest debts into a single, more manageable loan with better terms, you can save money and create a clear path to becoming debt-free.
Take the first step today by assessing your options and choosing the right consolidation method for your financial situation.
Frequently Asked Questions
Can you consolidate payday loans?
Yes, you can consolidate payday loans with a personal loan to reduce costs and extend your repayment timeline. Before applying, verify that your chosen lender permits payday loan consolidation.
Can I consolidate payday loans with bad credit?
Yes, even with bad credit, you can consolidate payday loans through lenders specializing in subprime borrowers. Alternatively, debt settlement companies or debt management plans offer viable options when loan qualification is difficult.
What are some payday loan alternatives?
Personal loans, credit cards, and other financing options provide access to funds without payday loans' unfavorable terms. Consider these alternatives first, as payday loans should be a last resort due to their extremely high fees and short repayment periods.
Written byBrian Acton
Brian Acton is a seasoned personal finance journalist at BestMoney.com who specializes in loans and debt consolidation. His work has appeared in The Wall Street Journal, TIME, USA Today, MarketWatch, Inc. Magazine, HuffPost, and other notable outlets.