Payday loan consolidation has been an excellent remedy for many borrowers stuck in the payday loan trap. But, in the quest to pay off debt, one should know that getting a debt consolidation for payday loans can equally be as risky as the debt already accrued.
If you decide whether you should take out a consolidation loan, find out in this post how a loan consolidation may not be all it seems.
How Can a Payday Loan Become a Debt Trap?
Let’s assume you were in a financial fix, and a Payday loan came to the rescue. When you don’t meet the agreed payment time of a Payday loan, the lender will roll the loan into a new loan or renew the existing loan.
This allows you to pay only the interest fees while your borrowed principal loan is extended to a new date. However, if you continue renewing your loan or borrowing, you will pay interest fees while your principal loan cumulates into a mountain debt trap you can’t pay back.
At this point, you are left with the option of consolidating your debt.
What is Debt Consolidation?
Debt consolidation means rolling over all your multiple Payday loans into a single personal loan. With debt consolidation, your lender pays your payday loan debt while you pay in installments with a lower interest rate.
Here are some hidden facts about Payday loan consolidation/payday loan relief.
You may need Security If You Have Bad Credit.
A payday loan does not require security; that’s to say, you don’t need to provide collateral, a co-signer, a license, or financial documents for loan approval. But for loan consolidation, especially if you have multiple loans with a bad credit score, you will have to provide security to ascertain your creditworthiness.
Now here’s what they won’t tell you; in the process of not meeting the agreement for your loan consolidation repayment, you’ll have to give up your collateral or any form of security you provided.
Hidden Charges
The penalty fees, origination fees, and other additional fees of most consolidation loans are disturbing. Before signing up, you may not have carefully studied the agreement terms to note the additional charges and penalty fees written between the lines. Hence the need to understand the loan agreements before signing up.
Debt Consolidation Implies a Shift From Short-term Debt To Long-term Debt
Every debtor wishes to pay off his/her debt as quickly as possible and get on with life. However, it is not the case with debt consolidation.
See what Payday loan consolidation does; it will reduce the interest rate on the consolidated loan to buy you an extension of the payment time, which can last for two years or more.
Instead of ultimately helping you get out of the loan trap, it translates your short-term debt to long-term and this can jeopardize your future financial security.
Debt Consolidation Affects Your Credit Score
A Payday loan does not affect your credit score, but a payday consolidation loan will negatively or positively affect your credit score.
Debt consolidation loans provide payday loan relief, but undisclosed terms and conditions are also attached. Whatever loan you need to take, be careful, so it doesn’t take a toll on your finances.
