Can Debt Consolidation Help with Payday Loans?

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You might’ve heard the term “payday loan” or at least recognize the marketing messages associated with them: “Get Cash Fast!” and “Need Cash Today?” on daytime TV or in print ads. But how much do you know about how payday loans work, and more importantly, how can you manage payday loan debt effectively?

In this post, we’ll dive into one method you can use to pay off debt from payday loans: payday loan consolidation. Payday loan consolidation works similarly to how you’d consolidate debt from student loans or credit cards—you combine balances from multiple lenders and funnel them into one. This strategy can simplify the payment process and, in some cases, reduce the total amount of interest you pay over time.

Want to learn more about how payday loan consolidation could help you get out of debt? Use the links below to navigate throughout the article or read all the way through for a more in-depth perspective.

What is a Payday Loan?

Before we jump into how payday loan debt consolidation works or why you might consider it, let’s quickly define payday loans.

The Federal Trade Commission says payday loans are a type of cash advance where lenders issue an amount to a borrower in exchange for a personal check from the recipient for the same amount, plus lending fees. The amount borrowed, and fees are generally due on the borrower’s next payday.

At this time, the payday lender is authorized to cash the check or roll over the loan if it’s not being paid off by the predetermined deadline.

Payday loans have experienced public and regulatory scrutiny over the years due to their famously high interest rates (an average of $15 for every $100 borrowed), unfavorable loan terms, and high potential for revolving debt. In fact, several states have banned payday loans altogether, and Google recently decided to stop running consumer ads for payday loans.

Getting out of debt can be challenging no matter what type of debt you’re in, but research shows that settling payday loan debt is especially difficult. The Consumer Financial Protection Bureau estimated that 80% of payday loans are re-borrowed within a month of their initial withdrawal.

With that in mind, let’s take a look at some of the pros and cons of payday loans.

Pros and Cons of Payday Loans

If you’re considering applying for a payday loan, take a moment to review the pros and cons first:

  • Pro: Quick access to cash in emergency situations
  • Pro: Getting approved for a payday loan is typically easy
  • Con: Interest rates are very high—the average APR is 398%
  • Con: Repaying a payday loan is challenging
  • Con: Payday lenders typically expect repayment within two weeks of withdrawal
  • Con: Debt collection measures are often more aggressive

Payday Loan Consolidation

As we mentioned before, ending the cycle of payday loan debt can be a major challenge, due in part to the high interest rates and short loan terms associated with them. In fact, Pew Research Center estimates that the average payday loan recipient spends five months out of the year in debt.

Payday loan consolidation is one strategy that can be used to better manage payday loan debt.

The concept of payday loan debt consolidation—and debt consolidation in general—is quite simple. Pay off your existing loans with a high interest rate using a new loan with a lower interest rate. This way, you’re spending less money on interest over time and you’re only left to make payments on one loan instead of multiple.

Like any financial decision you make in your lifetime, it’s best to consider the pros and cons of payday loan consolidation before moving forward.

Pros and Cons of Payday Loan Consolidation

  • Pro: Potentially pay a lower (better) interest rate. APRs for personal loans range from 6-36%, while the average interest rate for payday loans is 398%.
  • Pro: Have more time to repay your loan balance. Payday loan terms are typically due on the recipient’s next payday, whereas personal loan repayment periods are between 12-60 months.
  • Pro: You can better plan and budget for loan payments. Rather than managing payments for multiple loans, you can plan for a single loan payment each month.
  • Con: Securing a personal loan can be more challenging because reputable lenders typically consider financial health, like your credit score, before supplying funds.
  • Con: Personal loans can’t be extended like payday loans—once the loan has been paid, you must apply for another loan if you need additional funding.

Now that you have a basic understanding of payday loan consolidation let’s take a closer look at how it works.

How Does Payday Loan Debt Consolidation Work?

To consolidate a payday loan, you’ll first need to apply for a personal loan with the lender of your choice. Ideally, the loan you’re applying for should have a lower interest rate than the payday loan(s) that you’re trying to pay off—the higher the interest rate, the more you end up paying on your loan. If you are approved for the personal loan, you would simply use funds from your new personal loan to pay off your existing payday loans at a lower interest rate. After you pay off the payday loan, you’ll only have the personal loan to pay off.

Payday Loan Consolidation: Step-by-Step

  1. Compare personal loans from various lenders
  2. Apply for the loan that makes the most sense for you
  3. Use the funds from your personal loan to pay off your other loans
  4. Create a plan to pay off your personal loan
  5. Pay off your loans!

If you’re not approved for a personal loan, you might consider applying with a different lender, but keep in mind that lenders typically run hard inquiries on your credit, which can result in a dip in your credit score. Alternatively, you might focus your debt repayment strategy elsewhere—we’ll discuss more ways to manage your debt a little later on in this post.

Personal Loans: Are They Right for Me?

In order to consolidate your payday loan debt, you’ll need to apply and be approved for a personal loan. Unlike payday lenders, personal lenders consider your credit score, income, debt-to-income ratio, and more before they approve the loan. For some, the criteria to get approved for a personal loan are unrealistic based on their financial history. This is often what draws people to payday loans in the first place.

However, lenders have differing loan approval requirements, so it may be worth looking into the options available to you based on your credit score. Keep in mind, a lower credit score could mean higher interest rates on a personal loan, but it’s likely that the rate will still be lower than the interest rate on a payday loan. If your credit score is low, you might focus on raising your credit score before applying for an additional loan.

Not sure where your credit stands? Review your credit score and dive deeper into your financial health with Turbo.

Bottom line: A personal loan may have a lower interest rate than your payday loan, which could, in turn, lessen your overall balance due overtime. Additionally, consolidating multiple payday loans into one may make it easier to stay on top of your debt. However, like any other type of loan, a personal loan must be repaid. Payday loan consolidation should be used as a way to optimize the way you pay off payday loans, and cannot be used to avoid loan payment altogether.

More Ways to Manage Debt

If using a personal loan to consolidate your payday loan debt doesn’t feel like the right debt repayment strategy for you, fear not, there are several other ways to work your way toward living debt-free. Let’s take a look.

  1. Create a budget for paying off debt
    1. Use the Snowball or Avalanche method
  2. Prioritize debt payments
  3. Limit your spending
  4. Supplement your income
  5. Consider alternative loan options if necessary
    1. PALs are federal loans ($200-1,000) available from some federal credit unions that have lenient credit score requirements

Wrapping Up

Payday loan debt consolidation is one solution you might consider to help you pay off debt from payday loans. By taking out a new loan with a lower interest rate and better loan terms, consolidating your payday loan debt may turn out to be easier and cheaper for you to do.

Keep in mind, a personal debt still has to be repaid, so it’s important to have a debt repayment plan in place so that your finances don’t take any harder hits.

Before making any financial decisions, be sure to consider the options available to you—everyone’s financial situation is unique! Use this post as a resource to help you determine if consolidating your payday loan debt is the best course of action for your circumstances.


Written by Mint

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