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Payday loans typically come with higher fee rates than other types of financing, which make them difficult to pay off. That’s why many borrowers end up opting to renew their loan for free and owing more than the principal.

The good news is debt consolidation may be an option to make managing existing debts easier. Follow along to learn what this strategy is about, as well as what the reasons and eligibility criteria for applying.

What is Debt Consolidation?

Payday loan consolidation is combining multiple existing debts into a single monthly installment by paying them off with another type of allowance, such as a personal loan. This strategy could mean reduced interest rates, lower monthly installments, longer repayment period, and more manageable plan.


Let’s say you have multiple short-term debts with different amounts and APRs:

  • Short-term loan A: $500, 300% APR
  • Short-term loan B: $800, 200% APR
  • Short-term loan C: $1,500, 100% APR
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Rather than paying these debts individually, you can consolidate all three short-term loans with a single personal loan that requires one payment instead of three. For instance, if you consolidate these allowances into a $2.800 loan with 9.00% APR and pay off the loan in three years, you would pay $405.44 in interest.

Reasons for Debt Consolidation

Before deciding to consolidate your existing payday loan debt, you need to evaluate your goals. Customers may combine multiple short-term loans into one for a number of reasons, as follows below:

  • Lower total interest costs: If you qualify for a new source of financing at a lower rate and don’t make your repayment period longer, you will save on the total costs.
  • Reduce monthly installments: If you reduce your interest rate and/or make your repayment timeline longer, your monthly installment could be lower. 
  • Simplify repayment: When you pay off several debts with a single option, you only have one payment instead of several. This is usually easier to manage.
  • Avoid defaulting. When you realize that you can’t pay your payday loans on time, you may consider consolidation.
  • Change loan providers: If you don’t like your current lending companies, consolidation allows you to switch to a new servicer who you will deal with until pay off the principal.

All of these are good reasons for consolidating debt. Once you have decided that consolidation makes sense, it is time to apply for a new source of financing. Here is a step-by-step guide on how to qualify for a loan with the best terms possible.

How to Apply for a New Loan

There are two major rules to consider before consolidation: 1) apply for a new loan before you start missing payments, 2) borrow wisely. With this in mind, follow the steps below.

1. Calculate the Total Debt Amount

The first step is to calculate your current balances for all payday loan debt. Even though loan amounts for personal loans vary, $1,000 is a good place to start. So, you will need at least $1,000 in payday debt to apply.

2. Evaluate Different Offers

Once you add up your payday loan balances to pay off, do your research and compare loan options from different lending providers. Generally, personal allowances are offered at online lenders, credit unions, and other financial institutions. For applicants with good credit (690+ FICO score), it does not matter from whom to borrow. For applicants with no or bad credit history, credit unions and online providers may look more preferably.

3. Pre-qualify

Eligibility for a payday loan consolidation depends on several factors, including DTI ratio, income, and credit score. Before applying for a new allowance, it may be a good idea to try to prequalify. This will not affect your credit, but it can give you an idea of your chances to qualify, as well as the loan amount, interest, and terms you could receive.

4. Apply for the Loan

Once you have chosen a provider, it is time to apply. The procedure typically includes filling out a form, with personal info like your valid SSN, address, phone number, and other contact details. In addition, you will be required to submit documents, including proof of identity, employment, and income proof. If your application is approved, the funds may be available as soon as the next working day.

5. Pay Off Payday Loan Debts

Once the funds have been credited to your account, go to each payday provider and pay back your existing debts. This step is the most crucial because if you decide to use the money elsewhere, you could end up even worse in debt.

Once your debts are paid off, create a repayment plan to manage your new loan. Remember that missed payments usually mean late-fee penalties, and payments received one month or more past due can be reported to the bureaus, hurting your credit.

The Bottom Line

A debt consolidation loan is a good approach to combine multiple short-term debts into one, which is typically easier and less costly to repay. However, this strategy simply shuffles your money around, and the new monthly installments will still need to be manageable for you to avoid future debt.

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