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Payday loans are expensive, high-interest loans with short repayment periods that can be difficult to repay on time. Borrowers who are unable to make payments may opt to roll over their loan or take out multiple payday loans. Eventually, borrowers end up owing more than the initial loan amount.
If you’re struggling to manage multiple payday loan payments, one option to consider is payday loan consolidation.
What is payday loan consolidation?
Payday loan consolidation is when you combine multiple existing payday loans under one new personal loan, which you pay off in monthly installments at a lower interest rate.
Consolidating payday loans with a lower-interest personal loan gives you a longer repayment period and small monthly payments that are easier to manage. In addition, paying down one loan instead of multiple can feel less overwhelming and help you stick to your debt payoff plan.
How does payday loan consolidation work?
If you want to consolidate payday loans, you’ll need to apply for a personal loan from a credit union, online lender or bank. Lenders will assess factors like your credit, income and debt as part of their approval process.
Once approved for a personal loan, you’ll receive a lump sum of money that you'll use to pay off your payday lenders. You’ll then make monthly payments on your new personal loan until that loan is paid in full.
How consolidating payday loans can help
Consolidating payday loans is a good idea if you can qualify for a personal loan and afford the monthly payments. Here's how consolidating can help.
You’ll receive a lower interest rate. Payday loans typically have fees that equate to extraordinarily high annual percentage rates — typically around 400% — which is why financial experts consider them a toxic form of debt for many borrowers.
Though personal loans can also have high APRs, they usually don’t exceed 36%. That’s the maximum APR consumer advocates say an affordable loan can have.
You’ll get more forgiving repayment terms. Payday loans are typically due in full on the borrower’s next payday. That can be unrealistic for many borrowers, leading them to miss payments and rack up hefty fees.
Personal loans are paid off in monthly installments with terms ranging from two to seven years. This means a longer loan, but it's also a clearer path out of debt since installments are smaller and don’t change over the course of the loan.
» MORE: Best personal installment loans
Here’s an example, with numbers
Paying three separate payday loans (and their hefty fees):
Say you have three $500 payday loans, all due in two weeks. Each loan charges $15 per $100 borrowed, which equals $75 per loan. After two weeks, you would owe $225 in fees alone to cover the three loans. If you can’t repay them and the lender rolls them over, you’d owe another $225 in fees.
After four weeks, you’d owe $450 in fees — on top of the $1,500 loan balance.
This is how borrowers get stuck in a cycle of renewing their expensive loans or taking on new debt. Their income goes toward keeping up with enormous fees, rather than paying off the balances.
Consolidating those payday loans with a personal loan:
Say you instead take out a $1,950 personal loan to pay off the three $500 payday loans plus their fees. Even with not-so-great-credit, you may qualify for a one-year personal loan with a 36% APR.
Here’s how that math would work out:
- Monthly payment: about $195
- Total interest: about $400
The total repayment toward a personal loan, about $2,350, is higher than the payday loan balance of $1,950; however, consolidating stops the cycle of borrowing at triple-digit rates. Rolling over the three payday loans two more times would quickly grow the balance to $2,400.
How to consolidate payday loans
1. Add up your payday loan balances
Your first step in consolidating payday loans is to add up your current balances for all payday loan debt. Personal loan amounts vary, but typically start around $1,000, so you should have at least $1,000 in payday debt before applying for a consolidation loan.
2. Shop around for the best loan
Once you know the amount you need to pay off your debts, shop around and compare loan options from different lenders.
Personal loans are offered at credit unions, online lenders and some banks. Credit unions and online lenders may give better rates and terms to applicants with short or no credit history or bad credit scores (629 credit score or lower) compared to banks.
» COMPARE: Best consolidation loans for bad credit
3. Pre-qualify with multiple lenders
One of the best ways to compare loan offers is to pre-qualify with multiple lenders to see which has the best deal. Pre-qualification is a short process that lets you see what loan amount, rate and term you may qualify for without hurting your credit score. Not all lenders offer pre-qualification, but many do.
You can pre-qualify with NerdWallet to check your rate with online personal loan lenders.
4. Apply for the loan and receive funds
Once you’ve chosen a lender, it’s time to formally apply. Applying for a personal loan includes filling out an application, usually online, with personal information like your Social Security number, address and contact details. You may also need to submit documentation, including proof of identity, employment and income.
If your application is approved, you’ll sign the loan agreement and receive funds typically within one week, though some lenders fund the same day you’re approved.
5. Pay off payday loans and begin repayment on your personal loan
Once you have the money, pay off your individual payday loans. This step is the most important. If you skip it and use the money elsewhere, you’ll end up even deeper in debt.
Once your payday loan debts are paid off, make a plan to pay off your personal loan. Missed payments can mean a late fee, and because personal loan lenders report payments to the three major credit bureaus, payments that are 30 or more days late will jeopardize your credit score.
Other ways to pay off your payday loans
If you don’t want to consolidate payday loans, or aren’t approved for a personal loan, consider these other options for getting out of payday debt.
- Nonprofit credit counseling: Nonprofit organizations offer financial counseling for those who struggle with debt. Though not all counselors may be able to negotiate with payday lenders directly, they can look at your overall financial picture and evaluate the best options for addressing payday debt. Some nonprofit credit counseling services are free, while others may require a fee.
- Borrow from family or friends: Close family and friends may be a resource if they’re willing to spot you emergency cash to repay your payday loans. Make sure to draw up a loan agreement to avoid any miscommunication about when and how you’ll pay them back.
- Ask about extended repayment: Some lenders may offer an extended repayment plan, which lets you make smaller payments over a longer period of time. In fact, in many states, lenders are required to extend the payment plan to borrowers who request them, default or are at risk of defaulting, according to the Consumer Protection Bureau. This option might carry an additional fee, and terms can vary by state and lender.
Payday loan alternatives when you need cash fast
One way to avoid having to take a payday loan in the future is to build an emergency fund, which is cash set aside to cover unexpected expenses. Even a $500 emergency fund can keep you out of payday debt.
Building an emergency fund takes time, though, so if you need immediate cash, these alternatives are less predatory than payday loans and don’t require good credit.
- Payday alternative loans (PALs): PALs allow federal credit union members to borrow small amounts of money at a lower cost and longer term compared to payday loans. You’ll need to become a member of the credit union to apply.
- Cash advance apps: Mobile apps like Dave, EarnIn and Brigit provide cash advances with fees that are usually lower than payday loan fees.
- Local financial assistance programs: Many nonprofits and religious organizations offer resources for people struggling to afford essential expenses like utilities, groceries or rent.
- “Buy now, pay later” payment plans: BNPL providers like Afterpay, Affirm and Klarna offer pay-in-four payment plans with zero interest. These apps can cover a necessary purchase you can’t afford upfront, but beware of overspending.
- Small-dollar loans: Some national banks, like Bank of America, Wells Fargo and U.S. Bank, offer small-dollar loans at lower rates than payday loans. If you have a good relationship with your bank, you may have a better chance of approval.
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