Payday Loan Consolidation: What it is and how it works
Payday loans that charge exorbitant fees can make it difficult to pay your bills. Paying off this type of debt is difficult because the borrower can become trapped in a cycle. Payday loans are taken out by approximately 12 million people each year. More than 80 percent of these loans can be rolled over to a new loan if the borrower is unable to pay the bill on the due date.
Payday loan debt relief is possible. Consolidating your payday loan debt allows you to get a new loan with a lower interest rate, and a fixed monthly payment you can afford over time. https://ipass.net/payday-loan-consolidation/
What are payday loans?
Payday loans are short-term loans that offer a low amount of money, usually around $500. The payment is due the next payday. Payday loans are often marketed as a bridge between paychecks. Payday loans have high annual percentage rates (or APRs) and fees. According to the Consumer Financial Protection Bureau, a typical payday loan of two weeks with a fee of $15 per $100 borrowed, has an APR close to 400 percent.
Although this type of loan may cause credit damage, it won’t improve it. Payday loans are not reported to credit bureaus so your payments won’t boost your credit. If you default on your payments, the lender will send your account to collections. This will affect your credit score and credit rating.
According to Pew Charitable Trusts, only 14 percent of payday loan borrowers are able to pay back their loans. The high cost of the loan can make it difficult for many borrowers to repay. A new loan with a fixed, lower interest rate could help you get your finances in order.
Consolidating payday loan debts: How it works
A debt consolidation loan allows you to take out a loan at a lower rate of interest and then use the funds for your high-interest debts. You’ll then repay the debt consolidation loan. Payroll loans are much more difficult to manage than monthly payments. Because the interest rate for a consolidation loan is much lower than a payday loan, you can pay the loan off over a longer time period of 12 to 84 month, instead of within two weeks.
You need to find a lender offering debt consolidation loans. Online lenders may run a prequalification test, which will not affect your credit. They will review your credit history and determine the interest rate, term and monthly payments you might be eligible for. Make sure that you have the monthly income to pay your monthly loan repayments before applying.
Contrary to payday loans, debt consolidation loan payments can be reported to credit bureaus. This means that timely payments can improve your credit score over time.
Consolidating a payday loan is a good idea
A consolidation loan is a loan that can be used to consolidate your payday loans. Consolidating debt typically offers:
- Lower fees
- Flexible repayment terms: Personal loan repayment terms typically range between 12 and 84 months. Payday loans must be repaid within the next payday or in a few weeks.
- Monthly payments that are predictable: A personal loan will require you to make one payment per month until the loan is paid off. Your payment will remain the same if the interest rate has been fixed.
- Credit check required: Although this may seem like a negative, a lender for debt consolidation wants to ensure that you are able to afford the monthly payments. They will usually check your income, credit reports, and ask about cash reserves. They may even be willing to work with someone with a lower credit score. Payday lenders don’t usually check that you can repay the loan.
- You can’t rollover the loan: Once you have paid all of your money back, you are done. The loan has been paid off and your account is closed. You can apply for a loan again if you require more money.
Consolidating a payday loan has its drawbacks
Although payday loan relief sounds appealing, you should think about these things before applying for a personal loan.
- It is possible to default on your loan payments. A job loss, or other financial hurdle could cause you to miss another payment. Late or missed payments can damage your credit score and lead to the lender threatening to take your account into collections. You can plan for financial emergencies by saving as much money as possible in an emergency fund.
- A low interest rate may not be available to you. Personal loan interest rates can range from 4 to 36 percent depending on your creditworthiness. Online lenders will work with those with poor credit scores. However, your interest rate might be higher. These rates are still much lower than those for payday loans, which can have an APR of up to 400 percent. If you are a member of credit unions, you can also consider payday alternative loans. These loans are short-term and have affordable interest rates.
There are alternatives to consolidating payday loan debt
These alternatives may be a better option if consolidation of payday loan debt is not right for you:
- Request to extend the repayment term: In certain states, payday loan lenders may require that you extend your repayment period beyond your next paycheck. This will allow you to make smaller payments and have more time to collect the money. Ask your payday lender whether this option is available and if you will need to pay a fee.
- Get a debt management program: A debt management plan allows you to work with a credit counsellor to negotiate better terms with your creditors. After you have agreed on a monthly payment, the credit organization will send you funds each month. The organization will then pay your creditors. Before signing up for a plan, it is important to find a reliable credit counseling agency.
- Chapter 7 bankruptcy:Chapter 7 bankruptcy can be used to help people discharge some, or all, of their debts. To pay some of your debt, you will need to follow a strict procedure. Some assets may have to be sold. Because of the serious consequences, this move should be reserved for last resort. It will affect your credit score and make it difficult to get credit for the next few years. Before you decide to pursue this option, consult an attorney.