Payday loans are short-term loans intended to help borrowers who have an urgent need to cover monthly expenses until their next paycheck arrives. While they’re intended to provide a temporary solution to a temporary cashflow issue, they can cause serious problems if abused. Payday loans carry high interest rates, and if you fail to repay them when they first become due, they can quickly grow into an insurmountable mountain of debt – only exacerbating your cash flow problem.
Not to mention, they impact your credit. Although the payday loans themselves won’t appear on your credit report, they can be sold to collections companies who may then report the debt to credit bureaus. And payday lenders are not the easiest to manage: In fact, they tend to be litigious and many will sue borrowers for delinquent accounts, only adding to the stress of limited cash and mounting debt.
If you’re already in the thick of juggling payments on your payday loans, debt consolidation can help you find relief.
Here’s how it works.
A lending institution will give you a single loan to help you pay off your other debts – especially high-interest debts like payday loans. The loan will have a lower interest rate and you can repay it over a longer period of time. As such, your monthly payment will be lower. Once you pay off your payday loan with a debt consolidation loan, your payday loan will show as “paid in full” on your credit report – which will help your credit in the long term. This can substantially reduce your stress and help you get out of a sticky financial situation quickly.
Keep in mind, though, that some debt consolidation programs will require you to be past due on your payments before you can qualify for a consolidation loan. And if you’re not already past due on your accounts – letting yourself become delinquent will negatively impact your credit. That said, if you’re current on your payments, stay the course. Don’t skip a payment simply so you can borrow a consolidation loan. As long as you can make all of your payments in a timely manner, it is best to continue to do so.
Beyond obtaining a debt consolidation loan to knock out your high-interest payday loan, there are ample options to help you find debt relief as quickly as possible.
- Consolidating your payday loans with your other debts – This involves a strategy of combining your payday loans and credit card debts into a single monthly payment plan. The debt consolidation company you engage will offer you a monthly payment plan that works for your budget. This will require you to open a separate account exclusively for the loan consolidation program. In order to qualify, you will need to be at least 18 years old, have an active bank account, and present your most recent pay stub and a certificate of employment. Other requirements may apply based on your situation and your lender.
- Enter a debt management program – This approach involves working with a credit counselor to manage your consolidated payments and your account on your behalf. This may be a viable option for you if you feel overwhelmed by managing your payments on your own.
Tips for Payday Loan Consolidation
First and foremost, avoid payday loans altogether if your credit is bad. While you can still borrow a payday loan with bad credit, there is a higher chance that you won’t qualify for a low-interest debt consolidation loan should you need or want one down the road. If you do take out a payday loan, don’t borrow more than you actually need. In other words, don’t borrow more than your salary. This will only increase your interest and the amount you need to pay back over time.
Finally, no matter which debt relief approach you ultimately choose, maintain a strict budget. If you borrow a debt consolidation loan or enter a debt consolidation program, carefully plan your expenses so that you can make your payments on time, keeping your finances – and your credit – intact.
Don’t Tackle This Alone
You may eventually opt to enter a debt consolidation program to help you manage this process, but before you do so, be sure to thoroughly research the company you’re engaging to ensure they’re reputable, accredited, and sufficiently experienced to help you.
Tim has a finance degree from CSUF with 15 years of combined experience in CountryWide Debt Relief, a debt consolidation company. He has a great passion for writing, and he provides useful advice through his article on debt relief, debt consolidation loans and credit card consolidation.