Each year, approximately 12 million Americans take out payday loans. What some might not realize is pay day loans are among the most expensive ways to take a loan. It's not uncommon for the annual percentage rate (APR) on a pay day loan to exceed 300%, which is astronomical in contrast to the typical credit card APR of roughly 16%.
Some payday loan borrowers wind up held in an apparently endless cycle of debt once they extend their initial loan because they're unable to afford their payments or they take out another pay day loan to pay for them back. If you fall under the payday loan debt trap, you might want to consider a payday consolidation loan. A payday loan consolidation can help you escape this debt trap and save you from paying sky-high interest on payday loans.
What Is Payday Loan Consolidation?
Payday loans may seem like the solution to short-term financial shortfalls, however they can certainly result in long-term financial distress. One potential solution to the burden of payday loan debts are consolidating your pay day loans. A debt consolidation reduction loan is made to group your high-interest loan balances into one lower-interest loan.
While an average payday loan is designed to get paid off inside a few weeks, many borrowers are unable to completely eliminate them in that time. Because pay day loans can typically be extended or renewed, they are able to take months to pay off, as opposed to a few weeks—adding even more to what the borrower owes.
Let's say you are taking out a $300, two-week loan from a payday lender, and also the lender hits you with a finance fee of $50. When the loan pays off within two weeks, the annual percentage rate is the same as 434%. If you can't repay this debt within two weeks, the lender may extend the due date, but another fee will be tacked on. This debt cycle will keep going if you take out several pay day loans. In fact, the normal payday borrower removes 10 loans, resulting in a pile of interest and costs.
Shifting your payday loan debt to a different loan by way of consolidation ends this debt cycle and gives you a chance to pay back your financial troubles over a longer period of time in fixed installments.
How Does Payday Loan Consolidation Work?
The biggest advantage of pay day loan consolidation is that it allows you to cut costs by swapping several high-interest loans for one loan with a lower rate of interest. Typically, this tactic involves taking out an unsecured loan from a bank, credit union or any other lender. A lender typically provides you with 1 to 5 years to repay a personal loan.
As of May 2023, the average interest rate for a personal bank loan from a bank was 9.58%, according to the Fed. That's far underneath the interest rate for a typical payday loan.
Payday lenders normally don't perform a credit check when borrowers apply for a loan. Due to this, pay day loans often appeal to people with low credit scores, who may think they cannot be eligible for a a payday consolidation loan. That might not be the case, though.
You might be able to get a loan consolidation even when your credit rating is low, even though you might end track of a greater interest rate than you would having a high score. To find a debt consolidation reduction loan that might be best for you, take a look at Experian CreditMatch™.
If you're unable to qualify for a conventional consolidation loan, you might think about a payday alternative loan (PAL) from the bank. You can use a PAL, having a maximum APR of 28%, to consolidate and pay off high-interest pay day loans. Lending institutions typically provide you with as much as six months to pay off an associate.
Payday Debt consolidation vs. Debt Settlement
If you're deciding between pay day loan consolidation and debt settlement, consolidation could be the more sensible choice. Debt consolidation can pose “far more” risk than debt consolidation reduction, according to the National Federation for Consumer credit counseling Why? Because debt settlement companies tend to charge hefty fees, and the process may lead to significant harm to your credit.
Debt settlement companies negotiate for you in hopes that you'll pay less to your creditors than you owe. There's no be certain that debt settlement will work, however, which could leave you worse off than you had been before. A credit repair service often market their professional services as “debt consolidation,” but remember that debt settlement and debt consolidation aren't the same thing. Debt settlement means paying less than what you owe on a debt; debt consolidation reduction means your other loans will be paid as agreed and you will now have one “consolidated” loan payment each month until the new, lower-interest loan is paid.
Does Pay day loan Consolidation Hurt My Credit?
While a payday loan normally doesn't appear on your credit report, a payday loan consolidation typically does. Depending on how you manage the consolidation loan, it has the potential to help or hurt your credit.
When you first of all apply for a payday consolidation loan, you can expect to see a small but temporary dip in your credit rating. That occurs since the lender's request to view your credit score or score shows up on your credit history as a “hard inquiry.” Adding the payday consolidation loan may also create a ding for your credit rating because it'll reduce the average age of your accounts.
In the long run, however, your scores can easily see a noticable difference. Making making payments in time on the loan consolidation, keeping balances low on other credit accounts and avoiding unnecessary applications for credit might help drive this increase. By consolidating, you're also freeing yourself in the high-interest debt of your payday loans, which can help you save money and make your financial troubles payments less expensive.
The Bottom Line
If you are feeling like you're drowning in debt from payday loans, reaching out to a nonprofit credit counselor can help you get your head above water. Consultations with nonprofit credit counselors have the freedom. Prior to visiting having a credit counselor, it's a good idea to check your free Experian credit rating and are accountable to see where your credit stands.
Learn Much more about Payday Loan Consolidation
- What Is a Payday Loan and just how Do you use it?
Payday loans are a fun way to get cash fast. But their terms in many cases are complicated, so it's important to understand what you're accepting when you apply. - Understanding Balance Transfer Fees
A balance transfer card can lower your charge card payment by reduction of interest, before are applying, it's important to understand balance transfer fees. - Do You'll need Good Credit for a Payday Alternative Loan (PAL)?
Good credit might not be essential for a payday alternative loan (PAL); instead, having sufficient income is the key factor that determines should you qualify. - Can Pay day loans Be Consolidated?
Payday loans can produce a spiral of escalating debt that's difficult to escape-but a different sort of debt might help break the cycle.