How to consolidate your payday loan debt
How to consolidate your payday loan debt

Payday loans are usually small, short-term loans, usually around $500, due on your next payday. They are marketed as useful bridges between salaries. However, the cost of a payday loan translates into extremely high APR or APRs, making it difficult to get out of.

However, payday loan debt relief is possible. Payday loan consolidation allows you to take out a new loan, usually at a lower interest rate, with monthly repayments that can be repaid over time.

Why Debt Consolidation for Payday Loans Can Help

When you get a payday loan with high fees, the difficulty of making payments can feel overwhelming. This is a particularly difficult type of debt to pay because borrowers can get caught up in a debt cycle. About 12 million people take out payday loans each year, and more than 80 percent of those loans are converted to new loans because borrowers can’t pay their bills on time.

However, a debt consolidation loan can help because it is easier to manage and the cost of borrowing is significantly lower. There are a number of debt consolidation deals available to borrowers with bad credit at 35.99% APR. For example, a typical two-week payday loan that charges $15 per $100 equates to nearly 400% APR, according to the Consumer Financial Protection Bureau.

The sharp rise in interest rates means you can save a fortune by converting your debt into a new loan at a much lower rate.

How Payday Loan Debt Consolidation Works

With a remortgage loan, you can borrow at a lower interest rate and use the funds to pay off your high-interest debt. Then you pay off the debt consolidation loan over time. Monthly payments are easier to manage than payday loans. That’s because remortgage rates should be much lower, and you’re paying off your loan over a longer period of time, typically 12 to 84 months, not two weeks.


First, you need to find a lender that offers debt consolidation loans. Some online lenders will prequalify and won’t hurt your credit. They review your credit report and estimate the interest rate, repayment period, and monthly payment you may be eligible for. Before you apply, make sure you can afford the payment each month.

Unlike payday loans, debt consolidation loan payments are reported to credit bureaus. This means paying on time can help you improve your credit score over time.

Benefits of Payday Loan Consolidation

If you need help with your payday loan, a consolidation loan can help get your finances back on track. Debt consolidation loans typically provide:

Lower fees: Some personal loans come with a processing fee, usually around 1% to 5% of the loan amount, but you may be able to find loans with no upfront fees.
Flexible repayment terms: Personal loan repayment terms typically range from 12 to 84 months. Payday loans usually need to be repaid on the next payday or usually within two to four weeks.
Predictable monthly payments: With a personal loan, you make monthly payments until you repay the loan. When the interest rate is fixed, your payments usually stay the same throughout the loan term.


Required credit check: Debt consolidation lenders want to make sure you can afford your monthly payments before underwriting a loan. This may seem like a downside, but it means you’re less likely to get caught in a debt cycle. They usually check your source of income, check your credit report, or ask about cash reserves. They may be willing to work with you even if your credit rating is low. On the other hand, payday lenders usually don’t check if you can process the loan.
No flips: Once you pay off all your money, you’re done. Your account will be closed and the loan will be marked as paid off. If you need more money, you must apply for a new loan.

Disadvantages of Payday Loan Consolidation

Payday loan forgiveness might sound great. However, before applying for a new personal loan, you should consider the following:

You can still default on your repayments. While you plan to make every payment on time, unemployment or other obstacles could put your finances in a bind. Missed or late payments can affect your credit score, and credit consolidation lenders may send your account to the recipient. Try to prepare for a financial emergency by investing as much of your savings as possible in an emergency fund.
You may not qualify for low interest rates. Interest rates on personal loans typically range from 4% to 36%, depending on your credit rating. Many online lenders are willing to work with people with lower credit, even if your interest rate may be higher. However, they’re still less than the cost of payday loans, which carry annual interest rates of about 400% or more. If you’re a member of a credit union, you can also look for alternative payday loans. These are small short-term loans with affordable interest rates.

Debt Consolidation Alternatives to Payday Loans

If debt consolidation with payday loans doesn’t sound like the right fit for your situation, consider these alternatives.

Extend the repayment period

Some states require payday lenders to extend your repayments beyond your next paycheck. This may help because your payments will be smaller and you have more time to raise funds.


Ask your payday lender if it’s an option, if it can prevent a negative credit report, and if you’ll have to pay a fee.

Enter a debt management plan

As part of your debt management plan, you’ll work with a credit counselor to negotiate better loan terms with your creditors. Once you agree to make monthly payments, make monthly payments to the lender. In return, the organization pays your creditors.

It’s important to work with a reputable credit counseling agency, so research your options before signing up for a plan. Enrolling in the DMP will not directly affect your credit score, but you may have to close all accounts included in the plan. This can significantly improve your credit utilization and lower your credit score, making debt consolidation loans more profitable.

Plus, loan counselors charge a monthly DMP fee, and you may find a debt consolidation loan a cheaper option to get rid of those pesky debt balances.

Filing for Chapter 7 Bankruptcy

Chapter 7 bankruptcy is a legal process that can help certain individuals pay some or all of their debts. You have to follow a strict process and some of your assets may be sold to pay off some of your debt.

This step is usually a last resort because it has serious consequences. Your credit score will suffer and it may be difficult to qualify for credit for several years after bankruptcy.

If possible, try to get a debt consolidation loan, even if it comes with a higher interest rate, to minimize the lasting impact of bankruptcy on your credit score and overall financial health. Also, consult an attorney before deciding on this option.

Bottom line

If you’re struggling to eliminate your payday loan balance, a debt consolidation loan can help. Their rates are much lower, and you might even get approved with imperfect credit.

If debt consolidation for payday loans seems impractical, consider using alternatives such as rollovers, DMPs, and Chapter 7 bankruptcy to remedy the situation. Just make sure you go through the numbers to make sure the form of relief you’re after makes financial sense.

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