Payday Loan Consolidation: What is It and How Can You Use It?
In case you’ve got a payday loan that charges astronomical fees, you might find yourself overwhelmed by the payments. This is a very difficult kind of debt to pay off since it has a tendency of trapping people into a cycle of loans. Payday loans are taken out by 12 million people every day. Unfortunately, over 80% of these loans get rolled over into a new loan as the borrower fails to pay it back on time. If you’ve been facing problems with your payday loan, or you are curious about it in general, you’ve come to the right place. In this post, we will look at the different ways for payday loan debt relief. One of those ways is payday loan consolidation. It helps you take new loans at a lower interest rate and set up monthly payments that can be paid over time.
Payday Loan Consolidation: All You Need to Know
What are payday loans?
Payday loan is a term used to describe short term loans that are taken out for a small amount (hovering around $500). Unlike most loans, these loans don’t have a payment period that lasts over years. You are supposed to pay your loan back on your payday. These payday loans are often marketed as helpful bridges to help people between paychecks. However, payday loans come with fees that result in extremely high annual percentage rates (APRs). Let’s take an example of a small loan with a $15 per $100 borrowed fee. On the surface, it doesn’t sound all that bad but over the course of time, it results in an APR of almost 400 percent (as per the Consumer Financial Protection Bureau).
Can payday loans help with credit ratings?
No, payday loans generally do the opposite. They do far more damage to your credit than boosting it. These loans are not reported to the credit bureaus so even if you pay everything back on time, your credit ratings won’t have any boost because of it. On the other hand, if you fail to pay it back on time and your lender sends your account to collections, it will actually appear on your credit report, damaging your credit scores in the process.
Based on info released by the Pew Charitable Trust, only 14 percent of payday loan borrowers possess the ability to repay their loans. The excessively high costs make the loan somewhat unmanageable for borrowers. Hence, taking out a new loan with one lower, fixed interest rate might be a better way to get your finances back on track.
How does payday loan consolidation work?
With a debt consolidation loan, you can take a low interest rate loan and use the funds for paying off all your high interest debts. After that, you can pay the debt consolidation loan back over time. The monthly installments for these loans are far more manageable than the amount you will need to shell out for payday loans. That’s because the interest rate on a debt consolidation loan should be much lower, and you pay off the loan over a longer period, usually 12 to 84 months, rather than within two weeks.
How to get a payday loan consolidation?
Start by searching for a lender that offers debt consolidation loans. A few online lenders might run a pre qualification check. You shouldn’t worry about that hurting your credit score, it doesn’t. The lender will also review your credit reports and estimate the interest rate, loan term and monthly payment you may qualify for. Prior to applying for the loan, ensure that you are in a position to afford that every month. Unlike a payday loan, debt consolidation loan payments are reported to the credit bureaus. So, if you pay on time, you will also receive a boost to your credit ratings.
What are the advantages of a payday loan consolidation?
Debt consolidation loans typically offer:
- Lower fees: A few personal loans will charge 1 to 5 percent of the loan amount as an origination fee. However, if you look hard, you might be able to find a loan that doesn’t have any such charge.
- Flexible repayment terms: Personal loans offer long and flexible repayment terms that usually range from 12 to 84 months. Payday loans are generally paid off on every payday, so in a matter of two to four weeks.
- Predictable monthly payments: With a personal loan, you just need to make single monthly payments till your loan is paid off. With a fixed interest rate, this amount stays the same throughout the loan’s payment period.
- Required credit check: While this might seem ominous at first, it’s done to ensure that you can afford the monthly payments before you sign for the loan. The payday loan consolidation vendor will usually verify your income source, check your credit reports or ask about cash reserves. They might be willing to work with you even if you have a low credit score. Payday lenders don’t do any such checks and you might be burdened with loans you can’t pay back.
- No rollovers: When you pay your last installment, you are done with the loan. Your account is closed and the loan is marked as paid off. In case you want some more money, you will need to apply for a new loan and borrow money through that.
What are the disadvantages of a payday loan consolidation?
Payday loan relief probably sounds great, but you should consider these points before applying for a new personal loan:
- You are still susceptible to defaulting on open payments. Even though you might have planned to pay for everything on time, some unexpected development in your life might hurt your finances. Any missed or late payments could damage your credit score, and the loan consolidation lender may send your account to collections. In order to navigate financial emergencies, save at least 3-6 months of living expenses in an emergency fund.
- You may not qualify for a low interest rate. Depending on your creditworthiness, a personal loan’s interest rates may vary from four to 36 percent. While a lot of online lenders might work with people who have low credit scores, they might also charge very high interest rates. They’re still lower, however, than the costs of a payday loan, which can have APRs around 400 percent or higher. If you have a membership of a credit union, you can also get some small, short-term loans with affordable interest rates.
What are some alternatives to payday loan consolidation?
If payday loan consolidation doesn’t seem to be the thing that might work for you, you can try these other options as well:
- Ask for an extension on the repayment period: As per the laws of certain states, payday loan lenders are required to extend your repayment period past your next paycheck. This can prove to be helpful as the payments will be smaller and you’ll have more time to get the money together. Get in touch with your payday lender, enquire about this option and find out about the fee.
- Start a debt management plan: Under a debt management plan, you work with a credit counselor to negotiate with your creditors for better loan terms. Upon agreeing to a monthly payment, you will have to start sending funds to the credit organization each month. After that, the credit organization will pay your lenders. It’s important to work with a reputable credit counseling agency, so don’t jump into a plan without researching thoroughly.
- File Chapter 7 bankruptcy: Chapter 7 bankruptcy is a legal process that allows people to get rid of some or all of their debt. It’s not as easy and simple as just declaring bankruptcy. The process is quite strict and some of your assets might be sold for paying off some debt. Declaring bankruptcy has major consequences so only use this as your last resort. It will do major damage to your credit score and you will find it tricky to qualify for credit after bankruptcy. It’s best to consult a lawyer before going through with this option.
So that was a brief look into the world of payday loan consolidation. Hopefully, you have a better grasp of the concept now and will be able to use it for yourself if the need arises.