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Guide to Payday Loan Consolidation

Payday Loan Consolidation
Jason Steele
Jason SteeleUpdated March 13, 2023
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If you have multiple payday loans, it might seem like you will never be able to pay them off. High interest rates and fees, plus a short period of repayment, may keep borrowers stuck in a cycle of debt. Payday loan consolidation could help you break free. Here’s how payday loan consolidation works, the pros and cons, plus other options that might help reduce your debt. 

What Is a Payday Loan?

Payday loans are small loans, usually for about $500 or less, with payment due when you receive your next paycheck. Payday loans generally have high interest rates and fees, which could range from $10 to $30 for every $100 you borrow. If you can’t repay what you owe, you may end up rolling over the loan, which could result in more fees, potentially causing you to fall further into debt.Some lenders may require you to write a postdated check for the full amount due in case you don’t repay the loan. Some states have regulations on payday loans, but the regulations vary. 

Payday Loan vs Personal Loan

Although they can each be used for a variety of purposes, payday loans and personal loans are quite different. When you apply for a personal loan, a bank, credit union, or online lender checks your creditworthiness to see if you qualify for a loan. If you do, they may approve you for a certain loan amount. Personal loans typically range from $1,000 to $50,000 or more, although there are small personal loans as well. Personal loans tend to offer lower interest rates and fees and longer repayment terms than payday loans.When you apply for a payday loan, the lenders usually don’t consider your credit history, credit score, or income. You need to repay these short-term loans when you receive your next paycheck, usually within a few weeks. As mentioned, these loans come with high interest rates and fees.While you may be able to have more than one payday loan, how many personal loans you can have at once depends on the lender.

What Is Payday Loan Consolidation?

With payday loan consolidation, you combine multiple payday loans into one new personal loan, usually with a lower interest rate and a longer repayment term. This may make paying what you owe easier and more manageable.

How Does Payday Loan Consolidation Work?

To consolidate payday loan debt, you will need to apply for a personal loan with a bank, credit union, or online lender. As one of the personal loan requirements, the lender will do a credit check to see if you qualify for a personal loan, and what rates and terms you can get, and how much you can borrow.Once you’re approved for a personal loan, you’ll receive a lump sum of money you can use  to pay off your payday loans. Then you will make monthly payments on the personal loan until you’ve paid it off. Recommended: Guide to Debt Consolidation Loans vs. Personal Loans: Key Differences to Know

Will Payday Loan Consolidation Hurt Your Credit?

A payday loan consolidation will appear on your credit report. Payday loan debt consolidation can cause a temporary dip in your credit score because a hard credit check is typically done when you apply for the loan. However, if debt consolidation of payday loans allows you to repay your debt, it could ultimately help your credit by lowering your debt-to-income ratio. Plus, consistently making the monthly payments on the payday debt consolidation loan may also help your credit over time.

Pros and Cons of Payday Loan Consolidation

Before you consolidate payday loan debt, it’s wise to weigh the pros and cons.
Consolidating payday loans can lower your interest rate and fees,and increase your repayment term.Applying for a payday debt consolidation loan can cause a temporary dip in your credit score because a hard credit check will be performed. 
Payday loan consolidation means you’ll only have one monthly payment to make instead of multiple payments.You will need to qualify for a personal loan to consolidate your debt.
Paying off your debt may reduce your debt-to-income ratio.Late or missed payments could damage your credit score.

Alternatives to Payday Loan Debt Consolidation

If you’d rather not consolidate your payday loans, there are other options for getting out of payday loans. These include:  
  • Credit counseling: Some nonprofit organizations and counseling programs offer debt assistance for free. Credit counseling can help you create a plan to pay off your debt and give you tools and resources to help manage your finances. Look for a certified credit counselor.
  • Borrow from family or friends: You could take out a family loan if you have relatives or friends who will loan you the money you need. This could save you from paying fees. And family members might not even charge you interest. Just be sure to put the terms of the loan in writing, and repay the money on time and as agreed. 
  • Extend the payday loan repayment time: In some states, payday lenders are obligated to extend the length of your loan to help give you time to pay it back. However, there may be a fee for this extension, so check with the lender first.
  • Take out a home equity line of credit (HELOC): With a home equity line of credit, you can borrow against your home’s equity. Instead of a lump sum, you can borrow HELOC funds as needed during the draw period, which usually lasts up to 10 years. After that, the repayment period begins. But know this: If you fail to make payments on a HELOC, the lender could seize your house. 

The Takeaway

Payday loans can be difficult to pay off because of the high interest rates and fees involved, and the short repayment term. If you are struggling with trying to repay multiple payday loans, you may want to consider payday loan consolidation. Consolidating payday loans with a personal loan may lower your interest rate and lengthen your repayment term, and could make paying what you owe easier.If you are exploring the option of taking out a personal loan to consolidate your debt, Lantern can help. Our online tool makes it easy to compare rates and terms from multiple lenders at once to find the right loan for your needs.

Frequently Asked Questions

Can you do debt consolidation for payday loans?
Will payday loan consolidation hurt your credit?
How long does payday loan debt consolidation stay on your credit?
Photo credit: iStock/stockfour

About the Author

Jason Steele

Jason Steele

Jason Steele has been writing about credit cards and award travel since 2008. One of the nation's leading experts in this field, he has contributed to dozens of personal finance and travel outlets and has been widely quoted in the mainstream media.
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