For borrowers who want small-dollar, short-term loans right away, payday lenders are a good option. Typically, you won’t need to have your credit checked to borrow money, and your repayment period will be between two and four weeks.
However, many consumers cannot return such payday loans within two to four weeks. This may increase the expense of an already costly debt, particularly if you have many payday loans. Consumers may want to think about consolidating their payday loans to break the cycle.
What Is Consolidation of Payday Loans?
Although payday loans may appear to be the solution to short-term financial problems, they can quickly result in long-term financial problems. Payday loan consolidation may help those who are struggling under the weight of their payday loan debt. To save money over time, consolidating your debt into a single, more manageable payment may be a good option for you.
Although most payday loans are supposed to be repaid in a few weeks, many borrowers end themselves unable to make even the minimum payments. Payday loans may often be renewed or extended, thus repayment may take months as opposed to weeks, increasing the amount owed by the borrower.
Consider the following scenario: You tell the lender “i need $100 now” for 2 weeks. And the lender assesses a $30 financing fee on your account. The annual percentage rate is equal to 434% if the loan is repaid within two weeks. The lender may allow you to postpone making the payment if you are unable to do so within two weeks, but a new cost will be added. If you obtain multiple payday loans, this debt cycle may continue. In actuality, the average payday borrower obtains 10 loans, incurring a significant amount of fees and interest.
Consolidating your payday loans into one loan can break the endless cycle of interest and fees and allow you to repay the loan over a longer period with more manageable monthly payments.
How to Consolidate Payday Loans
Forms of unsecured debt are examples of the kinds of loans that often have very high-interest rates but may be consolidated into a single, more manageable loan with a reduced rate via a debt consolidation loan. This may speed up debt repayment by lowering the amount of interest you pay each month.
Consolidating payday loans into personal loans is a straightforward solution if you’re ready to escape the payday loan cycle.
Applying for the loan comes first. When applying for a loan, you will normally be required to give a range of personal and financial information as well as supporting documentation, such as recent pay stubs, W-2 forms, tax returns, utility bills, or a copy of your driver’s license. The lender will choose the details.
If authorized, you may utilize the personal loan proceeds to pay back the payday loan. After that, you would pay back your personal loan in accordance with its conditions.
Taking out a personal loan to pay off payday loans is a wonderful option, but only if you’ve thoroughly assessed your financial situation and made a strategy to keep on track after you’ve paid off the loan. If you don’t, you can end yourself in a loop of borrowing and having difficulty paying back your loans.
What Are the Benefits and Drawbacks of Consolidating Payday Loans?
DMPs and debt consolidation loans will be the main topics of this section. Remember that the advantages and disadvantages may change based on your circumstances and the consolidation method you choose.
Consolidation Loan Benefits:
Decreased Interest Rates
Annual percentage rates on payday loans may reach 400% or greater, although rates on typical bank loans or loans from internet lenders can be much lower.
Various Loan Arrangements
Due to the monthly nature of a consolidation loan, borrowers are less likely to get drawn into the trap of accumulating debt, which may seem impossible to escape once it begins to snowball.
Longer Phrases
Paying off debt with a consolidation loan may provide you more time than a payday loan, which typically gives you just two to four weeks.
Debt Consolidation Loans’ Drawbacks
You May Not Be Eligible
Consumers could fall short of the income, credit score, and other standards set out by lenders. As a corollary, the minimum loan amount required by a certain lender may be more than the amount you’re hoping to borrow.
Calls for a Credit Check
When you apply for a debt consolidation loan, the lender will often undertake a hard investigation, which might damage your credit score. They will do a rigorous inquiry since they want to extend their credit, which would lower their credit score.
Alternatives to Consolidating Payday Loans
If you’re having trouble securing a personal loan or don’t want to combine your payday loans, these alternatives may be worth looking into.
Credit counseling for nonprofits: Those who suffer from debt may get free credit counseling from nonprofit groups. As statistics show, 70% of people say that it has become easier for them to manage their finances after contacting such organizations. Though some counselors may not be able to directly bargain with payday lenders, they can nevertheless examine your total financial situation and determine the most advantageous ways to deal with payday debt.
Rely on friends or family for financing: If your close relatives and friends are ready to help you out with some last-minute cash to pay back your payday loans, they might be a valuable resource. To prevent any misunderstandings over when and how you’ll repay them, be sure to draft a loan agreement.
Inquire about protracted repayment: A longer payback term is possible with certain lenders’ extended repayment plans, which enable you to make smaller installments more often. Terms for this choice may change depending on the state and lender, and there can be an extra charge.
Conclusion
If you have carefully considered the benefits and drawbacks of your unique financial circumstances and are eligible for a personal loan, consolidating your payday loans may be a smart financial decision. If not, you could benefit more from alternative debt reduction choices.