Around 12 million Americans take out payday loans each year. Payday loans are one of the most expensive ways to borrow money. Payday loans can have annual percentage rates (APRs), exceeding 300%. This is significantly higher than the credit card’s 16% APR.
Many payday loan borrowers end up in a vicious circle of debt. They either borrow more money to pay interest or take out another loan. If you find yourself in the payday loan debt trap, you might consider a consolidation loan to pay off payday loans. Payday consolidation loans can help you escape this debt trap and will save you from the high interest payday loan rates. Find out more loan consolidator.
What is Payday Loan Consolidation?
Payday loans may seem like a quick solution to short-term financial problems but they can quickly lead you to financial ruin long-term. Payday loans can be reduced by consolidating them. Consolidating payday loan debts using a consolidation loan allows you to consolidate high interest loans into one low-interest loan.
Payday loans should be paid back in as little as two weeks. Many borrowers have difficulty paying off the entire amount in that time. It is common for payday loans to be extended and renewed, which means that they take longer than usual weeks to repay.
Let’s say you take out a $300 loan for two weeks from a payday lender. You pay $50 finance fees to the lender. If the loan is not paid in two weeks, the APR is equivalent to 434%. If you are unable or unwilling to pay the debt within two weeks, the lender may extend the due date. A fee will be charged. This debt cycle can continue if you have multiple payday loan accounts. Payday loan borrowers typically take out 10 loans, which can result in a lot more interest and fees.
Consolidating payday loan debt can help you end the cycle of debt. You can also repay your debt in fixed monthly payments over a longer period of time by consolidating payday loan debt.
What is Payday loan consolidation?
Consolidating payday loans can help you save money. You can swap multiple high-interest loans for one loan with a lower interest rate. This is typically done by obtaining a personal loan from a bank. A personal loan is usually repaid within one to five years by a lender.
Federal Reserve reported that the average personal loan interest rate was 9.58% in May 2021. This is significantly less than the average payday loan interest rate.
Borrowers who apply for payday loans won’t usually be subject to a credit check by payday lenders. People with poor credit ratings may be able to get payday loans. It could be false.
Even though you might be eligible for a consolidation loan, your credit score may not be as good. However, you could end paying more interest than you would if you had a better score. BridgePayday might be able help you locate a consolidation loan for debt.
If you’re not eligible, you may be eligible to apply for a payday loan alternative (PAL). The maximum interest rate for a PAL is 28%. It can be used to consolidate and pay off high-interest payday loans. Credit unions typically allow you to repay your PAL in as little as six months.
Consolidating a Payday Loan vs. Debt Settlement
Consolidating payday loan debts might be a better option than debt settlement or consolidation. The National Federation for Credit Counseling states that debt settlement can pose more risk than debt consolidation. It can lead to significant credit damage due to the high fees debt settlement companies charge.
Debt settlement companies can negotiate for you. They want to make sure that creditors pay less than what you owe. There is no guarantee that debt settlement can be achieved. This could put you in a worse financial situation than before. While debt consolidation companies are sometimes called “debt settlement”, they do not offer the same services. Debt settlement reduces debt. However, debt consolidation requires you to pay one monthly “consolidated loan payment” until you get the lower-interest loan.
Can consolidating a payday loan hurt my credit?
A consolidation loan will show up on credit reports. Payday loans are not usually reported to your credit report. Depending on how the consolidation loan is managed, it can help or hurt your credit score.
When you apply for a payday consolidation loan, you can expect a temporary drop in your credit score. The lender will request your credit score or credit report. This will be added to your credit file as “hard inquiry”. Payday consolidation loans can cause a drop in credit scores, because they will lower the average age of your accounts.
You may notice a rise in your credit score over time. This is possible by making timely repayments of the consolidation loan, keeping your other credit accounts in good standing, and not applying for too many credit cards. Consolidating your debt can help you get rid of high-interest payday loans. Consolidating your debt will help you save money and make it easier to pay your debts.
The bottom line
If you feel overwhelmed, a nonprofit credit counselor can help you overcome your payday loan debts. Nonprofit credit counselors offer free consultations. It is a great idea to check your credit score before meeting with a counselor.
