What is Payday Loan Consolidation?

If you're struggling to repay one or more payday loans, you’re not alone. Payday loans are high-interest loans that you’re typically expected to repay in full very quickly — usually when you receive your next paycheck. ¹ Because the repayment term is so short, many people have difficulty repaying payday loans while keeping up with other bills.

For some, payday loan consolidation may be an option. Payday loan consolidation means you take out a new, typically lower-interest installment loan to pay off one or more payday loans. Consolidating your payday loans with a personal loan could help make repayment more manageable by giving you more time to repay what you owe.

If you’re thinking about consolidating a payday loan, it’s important to understand how payday loan consolidation works, whether it may be right for you and what alternatives you may want to consider.

What are payday loans, and how do they work?

Payday loans are short-term, high-cost loans of about $500, although amounts may vary.² Repayment terms are typically two to four weeks, and repayment is often due in a single lump sum when you receive your next paycheck.³ Payday lenders commonly charge fees of $10 to $30 per $100 borrowed, which can quickly increase the cost of the loan.

Payday loans aren’t available in every state. In many states, payday lending is illegal. In other states payday lenders face strict limits on interest rates and fees.⁴

What happens if I can't pay back my payday loan?

When money is already tight, it can be challenging to repay a payday loan in just a few weeks. If you can't pay back your payday loan when it’s due, your lender may let you extend your original payday loan for added fees, which increases the total amount you owe. Approximately 80% of payday loans are extended or quickly followed by another loan.⁵

Managing multiple payday loans can make repayment harder, especially when due dates are tied to different pay cycles. More payments and deadlines can increase the risk of missed or delayed payments, which may hurt your credit score and lead to late fees. Over time, fees from multiple extensions and mounting interest can trap borrowers in a cycle of debt that’s hard to escape.

What does payday loan consolidation mean?

When you consolidate payday loans, you typically take out a new loan — often a personal loan — to pay them off. You then repay the new loan instead. Personal loans have lower interest rates, longer repayment schedules with payments spread over time that better fit your budget.

A personal loan used to consolidate debt is also called a debt consolidation loan.

You may consider payday loan consolidation when:

• You have a payday loan and are struggling with payments
• You have multiple payday loans
• You have a payday loan plus other debt to consolidate
• You want a longer repayment schedule
• You want a single monthly payment that stays the same
• You want a lower interest rate

How does payday loan consolidation work?

If you want to use a personal loan to consolidate multiple payday loans or a payday loan and other debt, you can apply with a lender, bank or credit union. Once you're approved, you'll receive a lump sum deposited into your bank account, though some lenders may pay your payday lenders and other creditors directly.

Personal loans are installment loans, meaning you repay them in equal monthly payments for a set term, often two to five years. By breaking the cost into multiple smaller payments over a longer period of time, a personal loan may be easier to manage than a payday loan. Personal loans also have lower interest rates than payday loans.

OneMain offers personal loans and debt consolidation loans ranging from $1,500 to $30,000 and takes your whole financial picture into account to help you decide on the loan that's right for you.

Can I qualify for payday loan consolidation with a lower credit score?

If you’re worried that a lower credit score could keep you from qualifying for loan consolidation, you may still have options.

First, it’s a good idea to prequalify with one or more lenders before applying. Prequalifying doesn’t guarantee approval, but it can help you get an idea of whether you might qualify, and if so, what type of terms you could be eligible for. Prequalifying won’t affect your credit score the way applying will, so it’s a good way to compare offers from lenders before you commit.

You could also consider applying for a secured loan, which is a loan backed by something of value, called collateral. With a secured loan, you may qualify for a larger loan amount or lower interest rate. Remember that the lender has the right to claim your collateral if you don’t repay a secured loan on time, however.

Having a cosigner, someone who agrees to be equally responsible for repaying the loan, may also help you qualify for a loan or receive a higher loan amount or lower interest rate.

Potential pros and cons of payday loan consolidation

Payday loan consolidation may be a helpful option for some, but it’s not the right fit for everyone. Here’s a look at what to consider.

Potential pros

Consolidating your payday loan could offer several benefits as you work to pay off your debt, such as:

• A longer repayment timeline
• A single monthly payment and due date
• A lower monthly payment
• Ideally, a better interest rate

Potential cons

However, there are also potential downsides to think about before deciding whether consolidation is the right step for you, including:

• Potentially higher overall costs due to a longer repayment term
• Possible added fees, such as origination fees
• More eligibility requirements, such as credit history and income
• Risk of losing collateral on a secured loan if you default

Ways to pay off payday loans

Depending on your situation, there are several other approaches that you could use to manage payday loan debt.

Extended payment plan (EPP)

Some states require payday lenders to give borrowers the option to repay their payday loan in smaller installments over a longer period of time. Payday lenders in other states may also offer this option, even if they’re not required to by law. Check your state’s laws and the lender’s policies to see if your loan is eligible.⁷

Debt management plan (DMP)

A debt management plan (DMP) is a structured debt repayment program, often coordinated through a credit counseling agency. It’s important to know that not all payday lenders work with credit counselors.⁶

If your payday lender is willing to work with a credit counselor, you can enroll that debt into a DMP. Your credit counselor uses this plan to negotiate with lenders on your behalf to possibly lower your monthly payments, fees or interest rates on your loans and other debt. You’ll make a single monthly payment to the credit counseling agency, which then distributes funds to your creditors. A DMP doesn’t replace your payday loans, but it can help organize repayments.

If you're considering a DMP, make sure to work with a nonprofit credit counseling agency certified by the National Foundation for Credit Counseling (NFCC).

Home equity loan or home equity line of credit (HELOC)

If you owe $10,000 or more in payday loans or other debt, and you're a homeowner with enough equity in your home, a lender may be willing to offer you a home equity loan or home equity line of credit to consolidate your debt.⁸

Before using a home equity loan or HELOC to pay off payday loan debt, it's important to know that both borrowing options are secured (backed) by your home. If you're unable to make your loan payments, you could lose your home. You may also need to pay appraisal fees or closing costs, which may be challenging if your budget is already stretched thin.

Loan from friends and family

Another option is to borrow from family members or friends with no bank or lender involved. Before entering into this kind of arrangement, everyone involved should carefully consider how it could affect the relationship. Disagreements about money can easily cause tension, so it's a good idea to put the terms in writing before any money changes hands.

Is payday loan consolidation right for you?

Whether payday loan consolidation makes sense depends on your specific situation.

You may consider payday loan consolidation if:

• You're managing multiple payday loans
• You want to combine multiple payments into one
• You qualify for a new loan with more manageable terms
• You can afford the payments on the new loan

Payday loan consolidation may not be right for you if:

• You don’t qualify for a loan with more favorable terms
• You can’t afford the payments on a new loan
• The new loan’s interest and fees would make consolidation more expensive
• A longer repayment term could cause you to pay more overall

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Take control of your loans

Payday loans have short repayment timelines and fee structures that make them difficult to repay. When you're dealing with multiple payday loans or a mix of payday loans and other debt, the payments might pile up quickly. Payday loan consolidation is one option that may help extend your repayment term and give you the room you need to get your finances back on track.

Sources

1, 2, 3, 4 https://www.consumerfinance.gov/ask-cfpb/what-is-a-payday-loan-en-1567/
5 https://www.pew.org/en/research-and-analysis/articles/2023/06/02/payday-loans-and-overdraft-a-short-history-and-whats-next
6 https://www.nationaldebtrelief.com/resources/personal-loan-debt-relief/payday-loans/debt-relief-options
7 https://www.experian.com/blogs/ask-experian/how-do-i-get-out-of-payday-loan-debt/
8 https://www.experian.com/blogs/ask-experian/smallest-amount-you-can-borrow-with-home-equity-loan-heloc/