How does payday loan consolidation work
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Aly J. Yale is a personal finance journalist with over 10 years of experience. Her work has been featured by Forbes, Fox Business, The Motley Fool, Bankrate, and The Balance.
Updated October 16, 2024, 2:45 AM EDT
Payday loans are a short-term, in-a-pinch option for consumers hard-pressed for cash. But they’re hardly a saving grace.
With sky-high interest rates and short repayment terms, they often lead to more costs than they’re worth. They can also cause a vicious cycle of debt that’s all but impossible to get out of — particularly for those living paycheck to paycheck.
How does payday loan consolidation work
Payday loan consolidation essentially means taking another loan — a personal loan, in most cases — and using those funds to pay off any remaining balances on your payday loans.
Because these loan types usually have much lower interest rates than payday loans, this can save you significantly in the long run. You’ll also enjoy a longer repayment period and can pay off the loan in monthly installments across several years.
A personal loan can help with your credit, too. According to FICO, payment history accounts for a whopping 35% of your credit score, so as long as you make on-time payments, you could see a credit score boost after several months.
9 OF THE BEST DEBT CONSOLIDATION COMPANIES
Aside from a personal loan, you could also consolidate your payday loan debts using a credit card or, if you own a home, by refinancing your mortgage, through a home equity line of credit (HELOC) or via a home equity loan.
“The best way out of the payday loan trap is through loan consolidation,” said Doug Lynam, principal at LongView Asset Management in Santa Fe, New Mexico. “Almost any conventional type of loan has a lower interest rate and better terms than a payday loan, whether through a local credit union, a credit card, or a home equity line of credit.”
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If you’re still unsure about how to handle your payday loans or get out of debt, consider speaking to a credit counselor or certified financial planner. They can offer personalized recommendations specific to your situation.
What are the disadvantages of payday loan debt consolidation?
Since consolidating your payday loans can almost always lower your interest rate and reduce your long-term costs, it’s rarely a bad idea if you can qualify.
That’s the caveat, though: Not everyone will be eligible to consolidate their loans via one of these strategies.
These loans come with credit score requirements, and HELOCs and home equity loans require you to own a home. Credit cards are more accessible, but if you make only minimum payments, the interest costs could end up quite significant in the long haul.