In general, payday loans are short-term loans for a small sum, usually about $500, where the payment is due on the next payday. They are advertised between paychecks as a helpful bridge. Payday loans, though, come with payments that equate to ultra-high percentage annual rates, or APRs.
How payday loan consolidation works
You’ll take out a loan at a lower interest rate with a debt consolidation loan and use the money to pay off your high-interest debts. Then, over time, you can repay the debt consolidation loan.
Roughly equivalent to payday loans, the payments are more feasible. That’s because there can be a much lower interest rate on a consolidation loan, and you pay off the loan for a longer period, typically 12 to 84 months, rather than two weeks.
Debt consolidation loan payments are posted to the credit bureaus, unlike a payday loan. This implies it will help you boost your credit over time by making on-time payments.
The Benefits of Payday Loan Consolidation
If you need assistance with payday loans, then a consolidation loan will help you get back on track with your finances.
§ Origination Fees: Many personal loans come with an origination expense, typically about 1 percent to 5 percent of the amount borrowed, but without an upfront charge, you will be able to find a loan.
§ Predictable monthly payments: For a personal loan, before you pay off the loan, you can make one monthly payment. Your payment usually stays the same over the life of the loan if the interest rate is fixed.
§ Flexible Terms: Personal loans offer terms of repayment that typically vary from 12 months to 84 months. However, payday loans should be repaid on the next payday, or generally within two to four weeks.
The Drawbacks of Payday Loan Consolidation
Payday loan consolidation undoubtedly sounds fantastic, but before applying for a new personal loan, you should remember these points:
§ The Default Might Still Happen: While you intend to make every payment on time, your savings can be thrown away once again by a job loss or some other problem. Your credit score could be affected by any missing or late payments, and the loan consolidation lender can send collections to your account.
§ Qualification for Low Rate Interest might be affected: Depending on the creditworthiness, personal loan interest rates usually vary from around 4 to 36 percent. In your case, the interest rate could be on the higher end, while many online lenders are willing to work with people with low credit scores.
