Carrying a heavy debt load can be exhausting. It is hard trying to stay on top of the payments, especially when the debts cover different types of loans. Making regular payments on a payday loan which charges exorbitant fees can leave you feeling overwhelmed. Payday loans are a difficult type of debt to pay off as it creates a cycle of debt.
What Are Payday Loans?
Payday loans tend to be short-term loans that offer a small amount of money of around $500. However, the payment has to be made the next payday. These loans are marketed as an effective bridge between a paycheck. But, payday loans have a ton of fees which translate into hefty annual percentage rates. For instance, a two-week payday loan will have a $15 to $100 borrowed fee and equal 400 percent APR. Payday loans can easily damage your credit rating, but are unable to boost it. The reason behind this is the fact that payday loans do not get reported to the credit bureau. This means that payments made will not help boost the credit rating. On the other hand, if one defaults on payments, the lender would send the account for collection and it would end up appearing on the credit report which will damage the credit score.
According to a study conducted by Pew Charitable Trusts, it was found that just 14 percent of payday loans can be repaid by borrowers. These loans can quickly become unmanageable due to the high costs. Hence, it might be best to consider taking out a new loan that has lower fixed interest rate in order to meet your finances.
Every year, more than 12 million people seek a payday loan and over 80 percent of such loans convert to a new loan as borrowers are unable to pay off the bill on time. But, it is possible for borrowers to find payday loan debt relief. This is where payday loan consolidation comes into place. It makes it easier to repay the debt. With payday loan consolidation, you get to take out a new loan for a lower interest rate that requires monthly payments which are much easier to pay off.
How Do Payday Loans Work?
Normally, your paycheck is used as a security when getting a payday loan. Besides, when applying for a payday loan, even if you have no credit or a bad credit score, you will still be able to get a payday loan. The reason why lenders do not care about your credit is because of the fact that they have the authority to get payments directly from your bank account as soon you receive the next paycheck. Hence, payday lenders have minimum risk, whereas, the borrowers bear the brunt. When you get approved for a payday loan, you have to provide a postdated check to the lender which they can deposit the next payday. Moreover, if you seek an online loan, you have to authorize the lender to take your funds from the bank account once you receive your paycheck from your employer.
Risks Associated With Payday Loans
Sometimes, paydays seem to be too good to be true and it could not be further from the truth because they are more easily accessible compared to a credit card cash advance or a personal loan. If you are not careful, these loans can quickly become dangerous and you can find your credit score plummeting.
It is common for one to look for ways to minimize the effect of their payday loan fee when short on cash. Most borrowers mistakenly assume that they will be able to pay the principal and the fee the very next payday. But, your salary also needs to cover other expenses. Unexpected costs can easily derail your ability to repay the payday loan no matter how hard you try to set money aside. Perhaps, you decided to cut the gad budget for the entire month to pay back the amount. However, there is always a possibility of gas prices going up which would make it impossible to do so. If you are unable to repay the entirety of the full loan amount, it would roll over to a new loan. This is why it is crucial that you understand how payday loan debt consolidation works.
How Does Payday Loan Debt Consolidation Work?
In principle, when you have a debt consolidation loan, you get to take out a loan that has a lower interest rate to pay off the high-interest debts. As for the debt consolidation loan, you have more time to repay it. The monthly payments tend to be a lot more manageable than payday loans. This is because of the fact that the interest rate for a debt consolidation loan is lower and the loan amount is paid over a longer period of 12-84 months instead of just two weeks. However, it is vital that you look around for a lender that provides a debt consolidation loan. A pre-qualification check might be required by some online lenders and it would not hurt your credit score. Such lenders only review your credit reports to estimate your interest rate, monthly payments, and loan term. Before you apply for a debt consolidation loan, you should make sure that you are able to afford the monthly payments.
Remember, payday loan debt consolidation payments are reported to the credit bureau unlike a payday loan. Thus, when you make payments on time, it will help improve your credit score. A payday consolidation loan is considered a personal loan.
Tips for Payday Consolidation Loan
If you are considering a payday consolidation loan, then the following tips will come in handy.
- Create a List of the Payday Loans
The first thing that you need to do before you seek a payday consolidation loan is to create a list of all the payday loans. Calculate the total amount, interest rates, and the total principal amount. By creating a list of all the debt balances, the interest rates, and the payments, you will be able to calculate the amount you need for a payday consolidation loan. It is important that you put your emotions aside and put in the work. When you have the total amount written on a paper, you will be better prepared to deal with the situation.
- Research Your Options
Now, it is important that you do not accept a payday consolidation loan from the first lender that you come into contact with. It is best that you research your options. There are plenty of lenders that offer payday consolidation loans. Hence, it is always a good idea to explore all your options. When it comes to debt consolidation loans, there are two main types that are available which include secured and unsecured loans. If you seek a secured loan, you will need some form of collateral as a backup like equity on your house. On the other hand, unsecured loans do not require any collateral. In order to choose the right type of loan, you should consider the loan fees, length, monthly payments, interest rates, penalties, and requirements. Compare the rates and terms on the different loan options.
The rate you need to look for has to be lower than what is currently being paid by you. The debt consolidation loan should help lower your monthly payments and not the opposite. However, you will need to consider the fact that it would lengthen the repayment period which means you would pay greater interest for a longer period. If the new consolidated loan requires you to pay more, then, you should be asking yourself that what the point of consolidating the loan is. It is important that you ask yourself if you have tried all other available options like finding extra work and cutting down on your expenses. The following situations will help you determine when payday loan debt assistance is the way to go.
- When you are facing a financial crisis because of bad payday loan debts.
- When you are looking for a way to protect your paycheck from the lenders.
- When you need to get rid of the payday loans that have high APRs.
- Work on a Repayment Plan
Find out how much you are able to afford to pay every month before taking a payday consolidation loan. It will help you decide which loan and repayment plan to choose. Evaluate your budget carefully and work out any areas where you can cut back on for the most optimal repayment plan. It will help free up much needed money to ensure that you stay on top of the monthly payments for the next loan. It is a good idea to find out different ways to get extra cash for debt repayment. This can be in the form of extra hours that you can put in on a job or side hustle such as babysitting, tutoring, or ride sharing. The options are endless. You just need to be willing to make a plan and stick with it.
- Make an Informed Decision
With so much information available over the internet, it can make you feel paralyzed or overwhelmed to say the least. It is common to have a fear of moving ahead. Therefore, it is even more important that you carefully research all your options, consider possible scams, read up on online reviews, and check customer complaints on the Consumer Financial Protection Bureau and the Better Business Bureau. The loan consolidation should be free for you to apply to and you should be asked for money during the application process. If you feel that something is fishy, then, it might be best that you do more digging in order to make an informed decision.
Advantages of Payday Loan Consolidation
There are many benefits of seeking payday loan consolidation. It will help keep all your finances on track. The following are some of the benefits of payday loan consolidation.
- Lower Fees: One of the main advantages of payday loan consolidation is lower fee. Although there are some personal loans which have an origination fee of around 1-5 percent of the loan amount, you should be able to find a loan that has no upfront fee.
- Flexible Repayment Terms: A great thing about payday loan consolidation is that you will find flexible repayment terms that range from 12-84 months unlike payday loans that require you to repay the entire amount the next payday or within 2 weeks.
- Predictable Monthly Payments: Another benefit of payday loan consolidation is that you will only need to make one monthly payment until the entire loan amount has been paid off. Since the interest rate will be fixed, you will only pay the same amount through the length of the loan.
- Credit Check Requirement: Although it might seem like a downside initially, but the lender wants to ensure that you are able to afford the payments every month before you sign the loan agreement. The lender will verify your source of income, check all your cash reserves, and credit reports. Moreover, even if your credit score is low, most lenders will still be willing to help you. On the other hand, payday lenders do not check your ability to repay the loan.
- No Rollovers: The main reason why most payday loan borrowers find themselves stuck in a debt cycle is because of rollover. However, when it comes to payday loan consolidation, once all the money has been paid back, you are free to go. Your account will be closed and the loan amount would be marked as paid off. Thus, if you require any more money, you can always apply for another loan.
Payday loan consolidation is one of the easiest ways to deal with a tough financial situation where you find it hard trying to keep up with the payday loan payment. Hence, it is crucial that you consider applying for a payday consolidation loan.