Payday Loan Consolidation: What It Is and How It Works

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 for a fee. With enough rollovers, this could mean owing more than the initial loan amount.

If you’re struggling to manage multiple payday loan payments, payday loan consolidation may be an option to consider.

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.

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.

When is payday loan consolidation a good idea?

As long as you can qualify for a personal loan at a lower interest rate than your payday debts and afford the monthly installments, payday loan consolidation is generally a good idea.

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 don’t exceed 36%, which is the maximum APR consumer advocates say an affordable loan can have.

Personal loans also have more forgiving repayment terms. Unlike payday loans, which are usually due in full on the borrower’s next payday, personal loans are paid off in monthly installments with terms ranging from two to seven years. Though this may mean a longer loan, it can offer a clearer path out of debt since installments are small and they don’t change over the course of the loan.

For example, for a $1,000 personal loan at 23% APR with a three-year repayment term, you’ll make monthly installments of $38.71. The loan will cost about $394 in total interest.

» MORE: How to get out of a payday loan nightmare

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’ll need at least $1,000 in payday debt to apply.

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 favorable rates and terms to applicants with short or no credit history or bad credit scores (629 credit score or lower) than banks.

» COMPARE: Best consolidation loans for bad credit

3. Pre-qualify

One of the best ways to compare loan offers is to pre-qualify. This 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 most online lenders do.

You can pre-qualify with NerdWallet to check your rate with online lenders.

4. Apply for the loan and receive funds

Once you’ve chosen a lender, it’s time to 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 lenders and begin repayment on your personal loan

Once you have the money, go to each payday lender and pay off your individual debts. 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 debts are paid off, make a plan to pay off your personal loan. Missed payments can mean a late fee and because lenders report payments to the three major credit bureaus, payments that are 30 or more days late will jeopardize your credit score.