Can Payday Loans Be Consolidated?
If you have difficulty paying off your payday loans, a debt consolidation strategy might be an option.
Payday loans are a good option for small amounts of money. However, they come with short payback periods and high interest rate (equivalent to triple-digit annual percentage rates), as well the potential for repeated withdrawals that could generate multiple fees. This makes them particularly risky for borrowers.
Payday loans should be paid in one installment. This usually happens within 14 days after the loan is taken out. Loan renewals can be costly and may delay the loan’s repayment process for weeks, or even months. According to a federal Consumer Financial Protection Bureau 2014 study, 80% of payday loan borrowers renew their loans at least once. 15% of these borrowers must make at least 10 payments.
Borrowers can renew loans by paying only the interest. This effectively extends the loan’s repayment period by two weeks but does not lower the amount. It is more expensive to re-borrow the original loan or pay the interest. This will increase the amount of the outstanding debt and the interest required to settle it.
Even though it sounds absurd, getting another loan is one way to get out of the payday loan cycle. Read more at https://oakparkfinancial.com/ for more details.
Consolidation of Payday Loans
It is similar to consolidating credit card debt that payday loan debt can be consolidated by taking out a loan.
The trick for most payday loan applicants is the idea of getting a traditional loan from the bank/credit union. Many payday loan borrowers believe they will not be able pass the credit screening necessary for conventional loans.
This assumption might be correct. You should explore all possible options for credit, even if you don’t have a perfect credit history.
Even if your credit score is not in the top range, you can still get out of the payday loan cycle. These are also known as (PALs) or payday alternative loans.
Payday Alternative Loans (PALs).
Credit unions often offer payday loans to borrowers with poor or limited credit histories. These loans can be for small amounts (200-1000 dollars) and don’t require credit checks. A PAL requires that a borrower is a credit union member for at most one month. A $20 application fee may be required or you can sign up for direct deposits from your paycheck.
As the name implies, PALs are a way to get assistance instead of a payday loan. To avoid the loan-renewal trap, a PAL can be used if you have a payday advance. A personal loan agreement (PAL), which allows you to borrow money to pay off payday advances, has many benefits.
- Payday loans have higher interest rates than PALs (the maximum annual percentage rate, or APR of 28%).
- You can repay the loan with PALs in fixed monthly installments for up to six months. Your debt is not subject to renewals or escalations.
- Your credit union may report PAL loan payments (Experian Equifax and TransUnion) to national credit bureaus. If they do report it, and you make all your PAL loan payments on time, it will be shown in your credit reports. If your credit history is poor, this will improve your credit score. These payments are not required to be reported by credit unions. You should ask about their payment reporting policies if you’re thinking of opening an account with one of these institutions to obtain a PAL loan.
You can only have one credit union PAL per year. Before applying for a loan, you must have paid all previous loans.
How payday loans can impact your credit
Payday loans have a significant disadvantage in that PAL loans can help you improve your credit score. Payday loans can’t improve your credit score because they don’t report your payments to the national credit agencies. Payday loan defaults can cause serious credit damage. The lender may turn the debt over to a collection agency, or even take other actions that could severely affect your credit. Payday loans do not offer the same credit-building opportunities that a conventional personal loan or PAL loan. However, missing a payday repayment can do more damage than late payments on other debt.
There are other options for managing payday loans
If you do not meet the requirements for a PAL and find yourself in a cycle of payday loan debt, you have other options. These include a debt management program or filing for bankruptcy.
- To help you repay your debts, you will work with a federally-certified credit counselor. Counselors may be able to help you negotiate with creditors such as payday loan providers and get them to pay a portion. It is not always possible.
- You may be eligible to have your debts erased or placed on a long-term repayment program depending on the bankruptcy filing you made. Your ability to borrow the future can be severely affected by bankruptcy.
Both bankruptcy and DMPs are considered severe negative events that can impact your credit score and cause permanent damage. This may seem small if you have low credit scores, but it can make a huge difference to how your credit scores rise.
Avoid payday loans if possible. Instead, you can use personal loans or PALs to meet your borrowing needs.