According to the latest Payday Loan Debt Statistics, an estimated 12 million Americans take out payday loans each year. If you’re one of these people, you already know that this loan usually charges over-the-top fees.
Also, the stress of making payments can be unbearable. Payday loans are tough to pay off because borrowers often get stuck in a debt cycle. Fortunately, debt relief is possible through a payday loan consolidation.
Here’s what you need to know about it.
What is a Payday Loan Consolidation?
While a payday loan might seem like the best answer to short-term budget shortfalls, this type of loan can quickly lead to long-term financial suffering. One solution to the stress and difficulty of paying off a payday loan is consolidating your debts.
This potential solution is meant to combine your high-interest debt balances into a single low-interest loan. Although a regular payday loan is set to be paid off within several weeks, lots of borrowers are incapable of paying the loan during that time.
And since payday loans can be renewed or extended, it can take a few months or even years to pay off, adding more debt to what the borrower originally owes. This cycle of debt can keep going if you take out a number of payday loans.
A typical borrower takes out at least ten loans, leading to a pile of fees and interest. You can end this debt cycle by consolidating your loans into a new, single loan debt. By doing so, you can pay off the debt in fixed installments over a more extended period.
How does Payday Loan Consolidation Work?
This strategy works by first taking out a low-interest rate loan. Then, use the money to clear your high-interest rate loans. After that, you will pay off the debt consolidation loan gradually during an extended period.
Compared with payday loans, the monthly payments for a debt consolidation loan are more convenient. Thanks to a lower interest rate. Plus, you repay the loan over an extended period, typically 12-84 months.
But before anything else, you must look for a lender that offers this type of loan. Some online payday loans lenders will conduct a pre-qualification check. But don’t worry, because it won’t hurt your credit.
Lenders will study your credit reports and estimate the monthly payment, loan term, and interest rate you might qualify for. Debt consolidation loan payments are accounted for by the credit bureaus, which means making prompt payments can help you build your credit over time.
Benefits
Payday loan consolidation generally offers:
- No Rollovers. Your loan account is marked as paid off and is closed once you have paid back your debt. If you need more financial help, you’ll have to apply for a new account.
- Marked Down Fees. Unlike payday loan fees, origination fees on personal loans are much lower. Even so, you might be able to look for a loan without an upfront cost.
- Mandatory Credit Check. While this might sound like a disadvantage, a lender wants to ensure you can manage the monthly payments before committing to the loan. Oftentimes, lenders will ask about cash reserves, check your credit reports, and validate your income source. Also, even when you have a bad credit score, they might agree to work with you.
- Accommodating Repayment Terms. Payday loans typically must be paid off within 2-4 weeks or on your next payday. On the other hand, debt consolidation loans offer repayment terms from 12-84 months.
- Foreseeable Monthly Payments. Your monthly payment generally remains the same over the life of the loan.
Downsides
Debt relief sounds excellent. However, before applying for a debt consolidation loan, consider the following points:
- You might not meet the requirements for a low-interest rate. Interest rates vary depending on your creditworthiness. Many lenders may be okay working with borrowers with low credit scores. However, the interest rate is likely on the higher end. Still, they are lower than payday loans.
- You might fail to make on-time loan payments. While you plan to make timely payments, some hurdles like a job loss may outflank your finances again. Remember that any late or missed payments could hurt your credit score. Also, the lender can send your account to credit bureaus.
To Wrap Up
With millions of people taking out payday loans each year, you are not alone. You can end this financial desperation by consolidating your debt into one monthly payment. However, qualifying for a debt consolidation loan might be more complex than for a payday loan.
So, before applying for a personal loan, be sure to check your credit scores, consider the minimum loan amounts, think about how fast you need the money, and prove you can pay off the loan on time.
