Payday Loan Consolidation
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What is a payday loan consolidation?
Payday loans by their nature are possibly the best method to borrow small funds from lenders at an instant, especially if you are running short on your monthly payment.
But, their simplistic procedure comes at a price (literally!).
Payday loans often have higher interest rates and a very limited payback time window. This often puts a lot of consumers in a tricky situation where they find themselves trapped in a vicious repayment cycle.
The fees and interest rates keep piling up over time, which leads to consumers repaying more than what they loaned out initially. Such an inefficient debt cycle affects your credit score adversely as well.
This is where a payday loan consolidation comes into play.
A payday loan consolidation, in its most fundamental nature, refers to the process of simplifying the procedure of clearing off multiple short-term loans. How?
By taking another large (personal) loan to pay off your payday loan debt. So, basically, you’re taking one extra personal loan to pay off your existing payday loan debt.
So, how does a payday loan consolidation work?
Apart from just taking out an extra personal loan to pay off multiple short-term loans, there are several other ways to get out of a payday debt cycle. This includes:
- Using your home equity loan/ home equity line of credit
- Using a balance transfer credit card to move your debt to another card with a lower interest rate
In most cases, however, applying for an additional personal loan makes more sense and is also a simpler approach as well. Personal loans allow you to apply for high amounts, and their fees and interest rate is also significantly lower than payday loans.
It is also important to know that a loan consolidation, debt relief loan, and debt consolidation loan all refer to the same thing.
The fundamental principle of a debt consolidation loan is very simple – you make a personal loan application to borrow a large amount of money and clear off the debts from multiple smaller loans. As such, you avoid paying multiple payday loan debts monthly at a higher interest rate.
Instead, you are left with only one monthly payment (personal loan debt) with a significantly lower interest rate to worry about.This, in turn, reduces the strain on your credit account and increases your credit score as well.
Also, remember that a debt consolidation loan does not necessarily reduce your principal debt amount. Instead, it increases your pay off duration, so you have a longer time window to pay off your debt at a lower interest rate.
Hence, in the long run, you end up saving quite a generous chunk of money due to lesser debts and lower interest rates.
Benefits of payday loan consolidation
Saves you money
The most obvious benefit of a payday loan consolidation is that it helps you save money. After all, that is the entire point of applying for debt consolidation in the first place.
Since personal loans come with lower fees and interest rates, they are a much cheaper option to consider as opposed to renewing multiple payday/unsecured loans monthly.
In the long run, you could potentially end up saving thousands of dollars to store away for a rainy day.
Simplified payment process
Which one do you think is more convenient? – Paying multiple small loan debts every month, or dealing with a single debt payment?
Well, unless you’re extremely unacquainted with the concept of streamlined payment, the obvious answer would be to deal with single debt payment. And that is precisely what a payday loan consolidations offer.
Instead of having to pay off debt amounts to multiple lenders at high-interest rates every month, a loan consolidation allows you to make payment only to one lender at lower interest.
This, in turn, simplifies the entire process of managing your debt payments every month.
Improves your credit score
Another important aspect of a payday loan consolidation that most people seem to be oblivious of is that it can boost your credit score. Of course, when you take out a new loan, your credit score decreases by a few points. But, as you continue making on-time payments to the loan debts, your credit score eventually improves.
Drawbacks of a payday loan consolidation
Lengthy repayment schedule
The vast majority of lenders usually provide a consolidation loan with a longer repayment schedule that can go up to 3-5 years. Although the monthly interest charges remain constant, bearing a loan debt for that much number of duration is not ideal for many customers.
Your credit history barrier
If you want to apply for a payday loan consolidation, your credit history plays a significant role. A poor credit score can severely hamper your chances of obtaining a consolidation loan.
In many cases, if you have a low credit score, you may not qualify for a low-interest rate consolidation loan. Instead, lenders can offer you a consolidation loan with high-interest rates (at least initially).
Payday loan consolidation considerations
As mentioned above, payday loans come with their fair share of pros and cons. Hence, you need to take some crucial factors into considerations before submitting your loan application.
Familiarize yourself with different types of fees involved. Some of the fees that lenders usually impose include:
- Application fees
- Origination fees
- Prepayment fees
- Late payment fees
- Funding fees
These charges are imposed on top of the interest rates that lenders offer. These fees come into play both before and after your consolidation loan approval.
The most crucial one of the bunch is the prepayment penalty fee. This fee comes into effect if you repay off the loan before the end of the repayment time frame. So, if you plan on paying off the debt before the final due date, make sure you do not involve repayment fee during the application process.
High-interest rates consolidation loan isn’t necessarily bad
While the ultimate aim is to secure a personal loan with a low interest rate, sometimes lenders do not offer the same. There are numerous factors that lead to such outcomes, most prominently your credit score, and your bank account history (transactions and saving balance).
Under such circumstances, you can wait until your credit score improves and reapply for the same. However, if the interest rate is manageable compared to what you’re paying on your existing (multiple) payday loans, it is best to accept the offer and proceed.