Payday Loan Consolidation: What You Need to Know | Personal Loans and Advice

Payday loans are designed to be short-term loans for modest amounts to bridge the gap from today until payday. While they can quickly get you the cash you need, those fast funds come with a price. While some states cap the interest rate, others allow lenders to charge annual percentage rates in excess of 600% – far more expensive than the average credit card.

If you have this type of loan you can get out from under those high interest rates through payday loan consolidation. With this strategy, you’ll use a personal loan to pay off your payday loans. If your credit is less than stellar, you may face a higher interest rate than borrowers with good credit. However, that interest rate will likely be far lower than what you’re paying with a payday loan.

Payday loan consolidation happens when you use a new personal loan, often called a debt consolidation loan, to pay off your existing payday loans. Your new loan will have a fixed interest rate and a fixed term, so your payments will remain the same for the life of your loan.

The benefits of consolidating your payday loans include slashing your interest rate and having a month-to-month versus payday-to-payday payment schedule. Not only could you have a more extended term to repay your debts, you could also enjoy significantly lower payments and pay less overall in interest. This can help you pay down your debt and build savings so you don’t have to take out additional payday loans.

“Payday loans are often a trap that keep people stuck in a place where they can’t be more financially successful,” says Rod Griffin, senior director of public education and advocacy at Experian. “A consolidation loan can help people get to a better place.”

Payday loans should not affect your credit score since they’re typically not reported to credit bureaus. A debt consolidation loan is different since lenders do report your payment history to one or more credit bureaus. The loan application process could also have a fleeting impact on your credit.

When you apply for a loan, the lender will take a look at your credit history and score, creating a hard inquiry. This type of inquiry can cause your credit score to temporarily dip a few points, but it should rebound within a few months.

Using a debt consolidation loan to pay off your payday loans could positively impact your credit as well. For instance, every on-time payment you make on your new consolidation loan gets reported to the credit bureaus. Over time, these on-time payments can help improve your credit score. As a result, you may qualify for lower interest rates on products like credit cards, auto loans and mortgages in the future – which can save you substantial interest costs.

To consolidate your payday loans, you’ll need to apply for a new loan with an online lender, bank or credit union. If you’ve had credit challenges in the past, don’t stress. Quite a few lenders specialize in “bad credit” debt consolidation loans.

If you still can’t qualify for a loan designed for those with lower credit scores, you can look for lenders that allow co-signers and co-borrowers. A co-signer is legally responsible for repaying your debt if you cannot, but doesn’t have a legal right to the loan funds. A co-borrower, often called a joint applicant, shares the responsibility for debt repayment and also has a legal right to the loan funds. Both can help you qualify for a loan when you need a boost, but many lenders don’t allow co-signers. Do your homework before applying. You can follow these steps to get your debt consolidation under way.

Before you consolidate your payday loans, you’ll need to gather information on your outstanding balances. Collect information on each lender, too. While you are looking for the best consolidation loan, be sure to keep up payments on your existing loans to avoid penalties and additional interest.

As you look for lenders for your payday loan consolidation, keep in mind your credit score, minimum loan amounts, current loan interest rates and interest rates offered on the new loan.

Upstart doesn’t require a credit score and maintains a loan minimum of $1,000. Achieve lends to those with credit scores as low as 620, but its loan minimum is $5,000. It could take some research to match your credit score and outstanding payday loan balance with the right lender.

For interest rates, you’ll want to make sure your new loan has an annual percentage rate that’s equal to or lower than your current payday loan rate. “If you have a high interest rate now, like over 200% APR, and you qualify for a loan at 35%, that’s still a 165 (percentage point) savings,” says James Lambridis, founder of DebtMD, an online service that helps match consumers with debt relief solutions.

Once you narrow down your list of lenders, you’ll want to prequalify for a loan. Ideally you’ll want a lender that can prequalify you using a soft inquiry. With a soft inquiry, you’ll simply enter some basic financial and identification information. Then, the lender will take a snapshot look at your credit and score to determine if you qualify.

If you do, you’ll be shown the annual percentage rates, loan terms and monthly payments available to you. From there, you can submit a full application.

Before submitting a full application, however, Lambridis recommends learning more about origination fees, closing costs and prepayment penalties. While these may not exist for all loans, they will add to your borrowing costs with certain lenders.

Once your full application is approved and you sign your loan documents, your lender will send you the funds. How quickly you receive your loan proceeds will depend on the lender, but can be as soon as the same day. When you receive your funds, you can pay off your current payday loans and breathe a sigh of relief.

Your debt repayment work continues with your new consolidation loan once your payday loans are history. You may want to sign up for autopay to ensure your payment is on time each month.

If taking out a new loan to consolidate your current payday loans isn’t the best move for you, you have other options.

The bottom line for payday loan consolidation: If you can qualify for a new loan and wipe out your high interest payday loan debt, this avenue is worth considering. You’re going to pay more in interest than borrowers with great credit, says Griffin, but your good payment history today will help you pay less over time and build a positive credit history. “A consolidation loan can help you get into the credit race, so you’re on the right track.”