Everything You Need to Know About Payday Loan Consolidation

Chang Fu
March 24, 2020

If you feel like you’re stuck in a never-ending cycle of payday loans, you’re not alone. Twelve million Americans take out payday loans each year according to the Pew Charitable Trusts, and the Consumer Financial Protection Bureau (CFPB) reports that more than 80% of those payday loans are rolled over or renewed within two weeks. 

Payday lenders make most of their profit from renewed loans. Excessively high interest rates (averaging about 400%) and difficult repayment terms (your entire balance due in two weeks) seem intentionally designed to keep consumers in a cycle of loan debt that can be very hard to break out of. To learn more about payday loan companies and their repayment plan, how they work, and the benefits and risks, you can read our payday loan article.

To keep up with the cycle, a borrower will many times end up renewing their payday loans multiple times and spending more in fees than the amount of their original loan. Some even turn to taking out new payday loans to help repay a previous loan. 

If you’re in a financial situation like this and your payments are becoming unmanageable, you may be considering to consolidate payday loans.. Read on to learn more about it.

What is payday loan consolidation? 

Payday loan consolidation is when you combine all of your outstanding payday loans into one loan. The objective of payday loan consolidation is to save on borrowing fees and establish more manageable repayment terms to repay the loan.

Payday loan consolidation can be achieved in a few different ways: taking out a personal debt-consolidation loan, going through a debt-management program, or settling your debt in a debt-settlement.

When should you consolidate? When should you not?

Promises of better rates and an easier repayment plan may make consolidating your payday loans seem like a no-brainer, but it’s not always the best idea. It’s important to evaluate your financial situation to decide if it’s a good option for you. 

You should consider debt consolidation if:

You should consolidate if you’re repeatedly having to renew a payday loan or you have more than one payday loan and you legitimately do not have the means to make your payments. This is especially true if you are currently experiencing financial hardship such as the loss of a job, spouse, or family member. 

Another thing that is important to consider is your well-being. If you are being harassed by your payday lenders for your inability to make payments (read our article about what to do if you can’t make your loan payments) and it is seriously affecting your well-being, consolidation is something you should consider.

Depending on how you decide to consolidate, for example if you choose to go with a debt-management or debt-settlement company, you will likely be restricted from opening new credit accounts. So it’s important if you go this route, that you are genuinely ready to commit to paying off your debts, sticking to a budget, and improving your spending habits. 

Lastly, and most importantly, you should consolidate if you have taken the time to do your research and you’ve found a consolidation partner you can trust. If you’re not careful, you could easily fall into a scam or end up working with a debt consolidation company that causes you more harm than good. 

You should not consolidate if:

If you are generally able to meet your payments without sacrificing your needs and you have a steady job or the ability to increase your income, you probably shouldn’t consolidate.  

You also should not consolidate if you aren’t committed to changing your spending habits, sticking to a budget, and refraining from creating more loan debt. This is particularly relevant if you’re planning to work with a debt-management or settlement company. 

Most importantly (and we can’t stress this enough), if you haven’t spent time weighing your options and talking with a few different companies before making a decision - you should not consolidate.

What you should evaluate when you’re looking for a debt consolidation program 

When you’re shopping around for a company to consolidate with, it’s imperative that you take the time to find a credible company or debt management program that you can trust. Here are some of the things you should be evaluating during the process: 

What’s their story? 

How long has the company been in business and where are they headquartered? Do they claim to be a nonprofit? If they do, make sure you check on their nonprofit status. It’s also really important to work with companies who are licensed and accredited. You’ll want a company accredited by one of the following groups: National Foundation for Credit Counseling , Financial Counseling, Association of America, Council on Accreditation. You’ll also want to verify your lender on the NMLS Consumer Access website.

Where are they located and how will you be communicating with them?

It’s really important to know beforehand what you can expect from a company in terms of what your first interaction with them will look like and what kind of support you will receive over the life of your consolidation program. It is highly recommended, for example, that your initial consultation is done in-person rather than over the phone.

Questions you should also be asking is what kind of customer support will be available to you should you decide to go with a company. What are their support hours? Do they offer support over the phone, or do they correspond via email or chat? What is their average response time? 

Are they transparent about their processes and their fees? 

When viewing a company’s website, pay close attention to how transparent they are about their fees and processes. The more information they are willing to provide up front, the better. You should leave a website with a good understanding of the process you will go through and the fees you will be charged. 

What are other people saying about them? 

Check out the company’s online ratings and reviews on BBB. You likely will not find a company that doesn’t have a complaint, but some will have more than others. How responsive they are to their customer complaints and whether or not they resolve them in a timely manner is also important. Looking at reviews will also help you to identify trends - for example, many complaints about debt-management companies have to do with customers still being contacted by loan lenders because although they are making a monthly payment to the debt-management company, the company is not making timely payments to lenders on their behalf. That’s like you doing the right thing and someone else causing you to fail!

Find reviews and information about the company online wherever you can find them, whether it be Google, Reddit or the company’s social media accounts. Are they active on social media? What kind of comments are their followers posting? 

You could also check with the company to see if they are willing to put you in touch with previous customers to chat about their experience using the service. 

What is your gut telling you? 

That feeling in your gut is a real thing. Use it to your advantage and remember that you are in control of your finances. When you’re getting to know a company, you should never feel pressured. Be weary of companies that initiate contact with you. You should be the first to reach out. You should also be weary about guarantees that sound too good to be true. These companies can negotiate your fees with your payday lenders, but they can’t guarantee an outcome. 

What does the process look like?

The process of debt consolidation around payday loans will differ based on the consolidation method you’ve chosen and the company you’re working with. Here’s a breakdown of the general processes for the different methods we’ve previously discussed: 

Personal debt-consolidation loan: You take inventory of all of your outstanding payday loan balances and apply for a personal loan for debt consolidation through a bank, credit union, or peer-to-peer lending service that is large enough to cover the total amount you owe. Assuming you are approved, you pay off your payday lenders using the loan money you receive. You are now no longer indebted to the payday lenders. You instead make monthly payments to the institution you’ve taken the loan out with in pursuit of becoming debt free. Be sure to shop around for the best rates when seeking debt relief. 

Debt management: You have a one on one credit-counseling session with a consultant, ideally in-person. During this session they will assess your financial situation, what you owe in debt and to who, what interest rates your debts are being charged at, what your income and monthly bills are like, and what kind of monthly payments you can afford to put toward your debt. They will then propose a plan to you. Once you accept, they will work with your payday lenders in an attempt to have your fees and monthly payments reduced to fit your budget. You are still indebted to the payday lenders, but you make your payments to the debt-management company and they pay your loan lenders the agreed upon amount on your behalf. 

Debt-settlement: Similar to debt-management, with debt-settlement you will likely start off with a credit-counseling session where your consultant takes inventory of your financial situation. They will propose a plan. Upon your acceptance of their plan, they will negotiate with your payday lenders. The difference between debt-management and debt-settlement is that debt-settlement consultants will negotiate with your payday lenders to reduce the total amount you owe, including your principal balance. When an amount owed is agreed upon, your debt-settlement company pays your payday lenders off in one lump sum payment. You are now indebted to the debt-settlement company and pay them monthly. 

It’s very important to make note that whichever method you choose for consolidation will likely take years to complete. Depending on the loan terms you agree on, paying off a personal debt-consolidation loan can take three to five years. Debt-management and debt-settlement programs can also take three to five years to complete and they can be very difficult for some because they require that your spending and credit use is monitored. 

Pros and cons of payday loan consolidation

Considering a time commitment of three to five years, it’s important to assure that you really understand what you’re getting into before you agree to any kind of consolidation. Weigh these pros and cons to help with your decision: 

Pros: 

  • You could potentially reduce the interest rates and fees you owe. If you’re working with a debt-management or debt-consolidation company, experienced consultants will handle the negotiating on your behalf. 
  • You’ll be put on a monthly payment plan that fits within your budget and is much more manageable. 
  • As part of their debt management program, the company you’re working with may provide financial education workshops, webinars, or online materials that you can take advantage of. 
  • You should receive less calls, emails, and letters from your payday lenders which may help reduce stress and improve your well-being. 

Cons: 

  • Consolidating your payday loans and paying them off entirely could take up to five years, that’s a long time! 
  • If you go with a debt-management or debt-settlement company, your spending and the amount of credit you’re able to use will be limited. 
  • You will be charged an initial set-up and monthly fee if you go with a debt-management or debt-settlement company. 
  • You’re probably paying for something you can do on your own if you go with a debt-management company. You can negotiate your fees and you can apply for a personal debt-consolidation loan. 
  • Your credit score could be impacted if the debt-management company you’re working with doesn’t make timely payments on your behalf

3 companies that you could consider consolidating with 

If you’ve decided that you would like to consolidate your payday loans, we’ve rounded up three companies worth looking into: 

Lending Club: If you’re leaning toward taking out a personal debt-consolidation loan, Lending Club is a solid option to consider. Lending Club is a peer-to-peer lending service that is often able to offer lower rates than traditional banks and credit unions due to the low operational costs of their online marketplace. They’ve also been around since 2007 and boast some of the highest satisfaction rates in the industry. 

With Lending Club, a borrower can loan anywhere from $1,000 - $40,000 and select either a 3-year or 5-year loan term. Their interest rates range from 6.95% to 35.89% and you can apply online without any impact to your credit score. Money is typically received within 4 business days. 

Things to consider with LendingClub are that you’ll need a minimum credit score of 600 and you’ll need to pay a “Loan Origination Fee” that ranges between 1%-6% of the total loan.

GreenPath Financial Wellness: Check out GreenPath Financial Wellness if you’re considering a debt-management plan. They’re a nonprofit debt management and counseling service available to residents in all 50 states (online and over the phone). What sets them apart is that they offer in-person consultations at their 60+ branches scattered across the country. 

They’ve been in the credit counseling business since the 70s and they’re certified by the COA, NFCC, and AICCCA. They’re also accredited by the BBB and have an A+ rating. In addition to their in-office consultations, they also offer Saturday credit counseling hours and a client portal where you can access all of your documents and chat with a team member. 

They do charge startup and monthly fees that vary by state. Their startup fee ranges from $0 to $50 and their monthly fee ranges from $0 to $75.

CuraDebt: If debt-settlement is the route you decide you’d like to take, CuraDebt is an option worth looking at. They’ve got over 19 years of experience in the business, an A+ rating with the BBB, and they save their customers an average of 40% after fees. 

They’re also willing to work with customers who have as little as $5,000 in debt which most of their competitors will not do. Your first consultation with them is free and you won't be charged a payment until a settlement is reached. On average their fees are 20% of the total debt, or less. 

They’re accredited by the AFCC and IAPDA and they offer online chat. The only downside is that they are not available in all 50 states. 

Alternatives to payday loan consolidation

Consolidating your payday loans may not be the right option for you right now, and that’s okay! There are other ways you can get debt relief from your payday loans. Here are some alternatives to think about: 

Extended payment plans: Give your payday lender a call and ask if you can work out an extended payment plan with them. This will keep your account out of collections and allow you to repay the loan in easier to manage installment loans. Depending on your payday lender’s policies, you may or may not be charged late fees during the arrangement. It’s important to be timely with your request, so get on the phone before your payment is due. 

Credit Counseling: Many nonprofit organizations offer free credit counseling sessions where they can provide you with a financial plan that you can execute on your own, including a budget you can follow and coaching on negotiating your rates and payment amounts. 

Payday Alternative Loans (PALs): Find a federal credit union near you that offers payday alternative loans (PALs). Loan amounts range from $200 to $1000 and rates are capped at 28%. The repayment terms are much more flexible extending up to 6-months if needed.

Credit Building Apps: If you would like to apply for a personal debt-consolidation loan, but you aren’t able to get approved due to bad credit, try a credit-building app like Possible Finance. With Possible Finance, you can borrow up to $500 and repay it over time while building your credit.

File for bankruptcy: Filing for bankruptcy is almost always viewed as a last resort because of the major impacts it will have on your credit. Just know that if you have exhausted all other options and you simply don’t have the means to repay your debts, this is an option. It will take years to rebuild your credit, but it’s not impossible.

Chang Fu

Chang is an avid writer, among other things, at Possible. He grew up loving reading and writing, creating his own poems and even a book he's now hidden in an old closet, unpublished. His financial experience at a large bank along with his passion for technology to help undeserved communities inspires him to write for Possible.

Sign up for our newsletter