Each year, around 12 million borrowers take out payday loans, according to Pew Charitable Trusts. If you're one of them, you likely know how important it is for you to have easy access to this source of credit — but also how hard it is to repay what you've borrowed.
Unfortunately, while borrowers often have no choice but to turn to payday loans to cover immediate expenses, Payday loans are some of the highest interest loans you can find, with the average annual percentage rate (APR) on payday loans across the country being 391%.
Payday loans are designed to provide cash in the short-term, just until you receive your next paycheck. But, because these loans are so expensive, many people have difficulty paying them back. This can necessitate taking out another payday loan, and then another, until you're trapped in a never-ending cycle that makes it feel impossible to get rid of your debt.
If you find yourself owing money to payday lenders, payday loan consolidation could potentially help you break the cycle. But, not all payday loan consolidation options are good ones, so you’ll want to explore and research if consolidation is right for you.
Can You Consolidate All your Payday Loans?
Payday loan consolidation involves either working with a consolidation company to negotiate a payment plan with payday lenders to make one lower monthly payment or taking out a new loan to pay back multiple payday loans. Whether you'll be able to go through this process depends on how much you owe on payday loans, as well as whether you're able to find a consolidation company willing and able to help you.
Combining loans with debt consolidation is a popular choice and often involves using a balance transfer credit card, personal loan, or home equity loan to obtain money to pay off existing debt. “Debt consolidation can help if you want to consolidate multiple payday loans into one, or it can also help if you want to roll payday loans into other forms of debt as an overall debt consolidation plan,” advised David Bakke, a debt expert at Money Crashers.
The problem is, if you've chosen payday loans, there's probably a reason — you may not have great credit or access to conventional sources of financing. In fact, Pew Charitable Trust research into payday loan users found less than half of people who took out a payday loan would've taken out a personal loan or used a credit card if the payday loan wasn't available.
And, even if your credit was good before you began borrowing with payday lenders, if you've been late in making payments or have judgments against you, your credit score may have fallen. With poor credit, many people with payday loans won't be able to qualify for the types of loans and credit cards traditionally used for consolidating debt.
The good news is, there are specific companies that cater to people with payday loans looking to consolidate, so it may be possible to find a loan that allows you to finally break free of the payday lenders you owe money to.
How Payday Loan Consolidation Companies Work
There are two main ways payday loan consolidation work:
1. They Negotiate Your Existing Debt
Some payday loan consolidation companies negotiate the balance on your payday loans with your current lenders. During this process, the consolidation company you're working with aims to get your total balance reduced, sometimes by examining your loans carefully to determine if the interest rate you're being charged is legal. The consolidation company generally arranges a payment plan that allows you to make one lump sum monthly payment to go to towards paying back the negotiated debts. This approach often involves payday debt settlement.
2. They Give You a New Loan
Some payday loan consolidation companies give you a new loan to pay back existing payday loan debts. Usually, this would mean paying the balance in full – but under different repayment terms.
Be sure not to confuse payday loan consolidation with payday debt settlement. With debt settlement, the goal is usually to reduce the total balance owed by getting payday lenders to agree to accept less than your current outstanding balance. Debt settlement will damage your credit, and lenders are likely to agree to it only if you're in bad financial shape and lenders fear you could declare bankruptcy. Consolidation, on the other hand, could actually help your credit in the long-term.
Pros and Cons of Payday Loans
While there are more cons than pros when it comes to payday loans, they do come in handy when your excessively strapped for cash or have poor credit that limits access to other options.
- Quick access to money. When you need cash now, you can usually get a payday loan very quickly.
- Bad-credit borrowing options. If you have a low credit score or no credit, conventional financing may not be available to you. You may need a payday loan to have access to any credit at all.
- Sky-high interest. You’ll pay an astronomically high APR, factoring in fees and interest
- Money is auto-deducted from your account. Money is typically taken out of your bank account automatically to make payments on payday loan. This automatic withdrawal means you can’t budget your money most appropriately for your situation.
The Problem With Payday Loans
While payday loans serve a purpose, these loans are problematic because of their reputation to prey upon people without easy access to other sources of financing. And, the terms of these loans are terrible.
The costs for a short-term loan are so high that it can be almost impossible to pay it back when payday comes — which is when it's due. So, borrowers are effectively forced to pay another fee to borrow more money to pay back the first loan. And, since payday loan payments are usually automatically debited from a bank account, borrowers are essentially forced into making payments to payday lenders even if they can't afford it. This can lead to overdrafted bank accounts.
“Payday loans are a debt trap by design and lead to cascade of other financial consequences such as increased overdraft fees and even bankruptcy,” the Center for Responsible Lending warns.
How Can You Find Legitimate Payday Loan Consolidation Companies?
If you're trapped in the payday loan cycle, it’s a good time to look for help on how to get out.
Looking for a company that negotiates your debt with payday lenders to try to reduce your balance means you’ll want to be highly discerning when reviewing your options. Reviewing the company’s past results is a good place to start.
In order to choose the best option, dig into the details of written contracts your receive to find out the specifics of what the company will actually do for you. And, make sure not to pay fees up front until you know how the consolidation process will work and what they company’s responsibilities are.
What To Look For
If you're going to consolidate your payday loans by taking out a new loan to pay them back, you need to make sure the new consolidation loan has:
- An affordable interest rate. With a consolidation loan, you should be able to substantially reduce the Annual Percentage Rate (APR) compared with what you're currently paying on your payday loans. When you reduce your APR, borrowing costs you much less since you pay less in interest and fees.
- Fees and other costs associated with the loan. Find out if the consolidation loan charges an origination fee, an application fee, or one-time or recurring costs. And, if you think you may be able to get out of debt more quickly by paying off your consolidation loan early, you'll also want to look into whether the loan has any prepayment penalties.
- Whether the loan is secured or unsecured. If you're able to obtain an unsecured loan, this is preferable. With unsecured loans, you don't put any of your assets on the line to guarantee the loan. With secured loans, you pledge your assets to serve as collateral. This would mean if you can't pay back what you owe, the lender can take the collateral.
- Affordable monthly payments. You want to make sure you can afford the payments you're expected to make on the consolidation loan.
- A reasonable repayment timeline. The longer your repayment timeline, the smaller your payments but the more total interest you'll end up owing. You don't want a payday consolidation loan that stretches payments out over money years as you'll end up paying a lot for the loan and it'll be years before you become debt free.
- Loan repayment terms. Look carefully at all of the terms and conditions of the loan. Is the interest rate a variable one, which means it could go up and your payments could go up along with it? Are you being offered a low teaser interest rate to start, only to have the rate go up during the repayment process? You need to find out exactly what costs you can expect to incur during the entire duration you're paying back the loan.
Some payday loan consolidation companies offer credit counseling as a part of the package. This can be an added benefit, as long as the company is legitimate. Just be careful to check out the company you work with, regardless of whether you want a consolidation loan or just want help negotiating a payment plan.
If a company is promising something that seems too good to be true, research carefully whether the deal is as good as it seems. You can also use the Consumer Complaint Database maintained by the Consumer Financial Protection Bureau (CFPB) to check out the company you're considering working with.
What Happens If You Don’t Pay Back a Payday Loan?
Consolidation could make repayment of payday loans easier by reducing your interest rate, sometimes reducing your total balance due, and allowing you to have just one loan with a monthly payment that's hopefully more reasonable.
It's important to do everything you can to try to find some way to pay back your payday loans because the consequences of not paying them back can be dire.“You might be hit with overdraft fees from your bank, debt collection companies may contact and potentially harass you, your wages may be garnished, and in serious scenarios you might face a lawsuit as well,” Bakke said.
Could You Face Jail Time?
The good news is, you can't go to jail for not paying payday loans — there are no debtor's prisoners in the United States. And, you can typically discharge payday loans in bankruptcy if you're truly unable to repay the debt you owe — although this should be a last resort due to the long-term financial damage that can result from a bankruptcy filing.
Is Payday Loan Consolidation a Good Idea?
Payday loan consolidation may be a good solution if you can find a trusted company to help you out. Just make sure that the payday loan consolidation company isn't going to compound your financial problems by charging you high fees for services that don't really help you get out of debt any faster. Exhaustively research your options and reviewing your finances before making a decision.