By Ben LuthiWhat Is Payday Loan Consolidation?
By Ben Luthi
Payday loans are one of the most expensive ways to borrow money, with annual percentage rates (APRs) that commonly exceed 400%. Many borrowers end up trapped in a cycle of debt, reborrowing again and again just to keep up with fees.
If you're stuck in that cycle, payday loan consolidation could help you break free by replacing your high-cost payday loan debt with a single, lower-interest loan. Here's what to know about how it works.
What Is Payday Loan Consolidation?
Payday loan consolidation is the process of combining one or more payday loans into a single new loan with a lower interest rate. Instead of juggling multiple payday loan payments with sky-high fees, you take out one loan—usually a personal loan—and use it to pay off your existing payday debt.
The goal is to reduce your interest costs and give yourself more time to repay what you owe. While a payday loan is typically due within two weeks, a consolidation loan lets you spread payments over months or years in predictable installments.
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How Does Payday Loan Consolidation Work?
Payday loan consolidation typically works by taking out a personal loan from a bank, credit union or online lender.
You'll use the funds to pay off your outstanding payday loans, then repay the personal loan in fixed monthly installments over a set term—usually one or more years, depending on the lender and how much you're borrowing.
Even borrowers with lower credit scores can often qualify for personal loan rates far below what payday lenders charge.
Payday Loan Consolidation Example
To see how much loan consolidation could save, let's assume you have three payday loans totaling $1,000. Each charges a $15 fee per $100 borrowed every two weeks (a common payday loan charge). If you roll them over for four months (about eight pay periods), here's what you'd owe:
- Fees per rollover: $150 ($15 x 10)
- Total fees paid: $1,200 (eight rollovers x $150 per rollover)
- Total cost: $2,200 ($1,000 principal + $1,200 in fees)
Now, imagine you consolidate those loans with a two-year personal loan at a 30% APR instead. Here's how the costs would break down:
- Monthly payment: $56
- Total interest paid: $342
- Total cost: $1,342 ($1,000 principal + $342 in interest)
Even if the lender charges a 5% origination fee, that only adds $50 to your cost. You'll still end up saving more than $800. You can use a personal loan calculator to get an estimate based on your personal situation.
Is Consolidating Payday Loans a Good Idea?
For many borrowers, consolidating payday loans is a smart move. Here are many of the benefits you may enjoy:
- Break the debt cycle. More than 80% of payday loans are rolled over or renewed within two weeks, according to the Consumer Financial Protection Bureau. Consolidation replaces that cycle with a structured repayment plan.
- Save money on interest and fees. Swapping a 400% APR for even a 36% personal loan rate can save you hundreds of dollars.
- Simplify your payments. Instead of tracking multiple payday loans with different due dates, you make one predictable monthly payment.
- Build a positive credit history. Payday lenders typically don't report your payments to the credit bureaus. A personal loan, on the other hand, can help you build credit through on-time payments.
Learn more: How Much Can I Borrow With a Personal Loan?
Are There Risks to Consolidating Payday Loans?
While consolidation is generally a positive step, it does carry some risks to consider before moving forward:
- Getting a new loan could temporarily ding your credit. Applying for a consolidation loan triggers a hard inquiry on your credit reports, which may cause a small, temporary dip in your score. The new account will also lower the average age of your credit history.
- Missed payments can hurt your credit in the long run. If you fall behind on a personal loan, the late payment can show up on your credit report and hurt your credit. Late payments remain on your credit reports for seven years.
- You could be tempted to reborrow. If you consolidate your payday loans but then take out new ones to cover expenses, you could end up in a worse position than before.
- You may pay fees on the new loan. Some personal loans charge origination fees, which are deducted from the loan amount before you receive your funds. Factor this into your total cost comparison to make sure it's a good move.
How to Consolidate Payday Loans
If you're ready to consolidate your payday loan debt, here are some steps you can take:
- Add up what you owe. List each payday loan, including the principal balance and any outstanding fees.
- Check your credit. Review your free Experian credit report and FICO® Score Θ to understand where you stand. Knowing your score helps you set realistic expectations for the rates and terms you'll qualify for.
- Shop around for a loan. Compare personal loan offers from multiple lenders. Look at APRs, fees, repayment terms and monthly payments. Experian's free personal loan comparison tool can help match you with offers based on your credit profile.
- Get approved and consolidate. Once you choose a lender, complete the application. After funding, use the money to pay off all of your payday loans immediately.
- Set up autopay. Many lenders offer a small interest rate discount for enrolling in automatic payments, and it helps ensure you never miss a due date.
Learn more: How to Get a Debt Consolidation Loan
Alternative Ways to Pay Off Payday Loan Debt
If you can't qualify for a personal loan or want to explore other options, consider these alternatives.
Payday Alternative Loans
Federal credit unions offer payday alternative loans with loan amounts up to $2,000 and APRs capped at 28%. You'll need to be a credit union member, but eligibility requirements are often flexible. There's no minimum credit score requirement, and application fees are limited to $20.
Credit Counseling
A nonprofit credit counselor can review your finances for free and help you create a plan to manage your debt. If appropriate, they may set up a debt management plan to consolidate your payments and potentially negotiate lower interest rates with creditors.
Borrowing From Friends and Family
If you can't qualify for a consolidation loan, asking a trusted friend or family member to help you pay off your payday loan debt could save you from racking up more fees. It's not always a comfortable conversation, but it can be a far cheaper path out of the debt cycle. Put the terms in writing and stick to the repayment agreement to protect your relationship.
Paycheck Advance Apps
If you're working to pay off payday loan debt, paycheck advance apps like Earnin and Dave can help free up cash in your budget. These apps let you access a portion of your earned wages before payday, which can help you make your loan payments on time without falling short on other bills.
Some charge small subscription fees or expedited funding fees rather than interest, making them a low-cost way to manage cash flow while you chip away at your debt. With some apps, it's possible to avoid interest charges and mandatory fees altogether.
Take Control of Your Payday Loan Debt
Getting stuck in a payday loan cycle can feel overwhelming, but consolidation offers a concrete path forward. Whether you choose a personal loan, a PAL from a credit union or help from a credit counselor, the key is to replace high-cost debt with something more manageable—and then avoid going back to payday loans.
Before you take the next step, monitor your credit with Experian for free to see where you stand. Understanding your financial picture is the first step toward improving it.
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About the author
Ben Luthi
Ben Luthi has worked in financial planning, banking and auto finance, and writes about all aspects of money. His work has appeared in Time, Success, USA Today, Credit Karma, NerdWallet, Wirecutter and more.
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