Payday loans can help you pay for essentials until your next payday, but they come with very high annual percentage rates (APRs). Relying on these loans too often can lead to a cycle of debt, making it difficult to pay them off.

Payday loan consolidation involves borrowing a loan at a lower APR and using the funds to pay off your payday debt. With a lower interest rate and longer repayment terms, debt consolidation loans are much more affordable.

Read on to learn more about how to consolidate payday loans, when to do it, and the pros and cons.

What is Payday Loan Consolidation?

Payday loan consolidation is the process of borrowing a new personal loan to pay off your existing payday cash loans. You can then pay off the personal loan in monthly installments.

When you borrow a lower-interest-rate payday consolidation loan with a longer repayment period, your monthly payments are lower. This makes it easier to manage your payment. With only a single payment each month, you’ll also be less overwhelmed and more focused on your debt payoff strategy.

How Does Payday Loan Consolidation Work?

You’ll need to borrow a personal loan for debt consolidation from a bank, credit union, or online lender. Once your loan is approved, you can use the funds to pay off your payday loan lenders.

You’ll then have a single monthly payment. Continue to make payments on time until your personal loan is paid in full.

Pros and Cons of Payday Loan Consolidation

While there are a lot of benefits to consolidating your high-interest payday loans, it may not always be the right option to get payday loan relief. Consider these pros and cons to see if they make sense for your financial situation.

Pros

  • You’ll pay a lower interest rate on a consolidation loan compared to a payday loan.
  • With a fixed interest rate, you’ll have a predictable payment each month.
  • You’ll save a considerable amount of money that you would have otherwise paid to rollover payday loans.
  • Payday consolidation loans have a longer repayment term of up to seven years instead of the two-week term that most payday loans have.
  • If you make timely payments on your new loan, your credit score will improve over time.

Cons

  • It may be difficult to qualify for payday loan consolidation if you have bad credit.
  • Your interest rates may be higher if you don’t have good credit.
  • If you continue to take on more debt or don’t address the root causes of your financial problems, you may find yourself in the same situation again.

When To Consolidate Payday Loans

Payday loans have very high APRs, usually around 400%, which is why it’s always a good idea to pay them off as soon as you can. Generally, it’s a good option if:

  • You qualify for a debt consolidation loan at a lower APR than payday loans.
  • You have a stable job that allows you to make payments.
  • You can afford the monthly installments on the new loan.

The average interest rate for personal loans is 12.35% as of July 2024. Even if you have poor credit, the highest APR you’ll typically pay is 36%, which is much lower than payday loans. As long as you can qualify for a payday consolidation loan, it’s generally a good idea.   

How To Consolidate Payday Loans

The application process may vary slightly by lender, but this is what you’ll usually need to do to consolidate payday loans:

  1. Review your current debts and add up the loan balances for all your payday loans. This will allow you to determine the loan amount you need to borrow.
  2. Shop around for consolidation loans at banks, credit unions, and online lenders to compare your options.
  3. Prequalify for a personal loan to see the loan amount, term, and rate you qualify for.
  4. Choose a lender and fill out the loan application.
  5. Submit documents, such as proof of income, employment, and identity.
  6. Review your loan agreement and sign it to receive the funds in your bank account.
  7. Pay off each payday loan and close your account.
  8. Start making payments on your personal loan.

Alternative Options to Pay Off Payday Loans

If you’re not approved for a personal loan, there are other ways to get out of payday loan debt. Here are a few options to consider:

  • Extended Repayment: Ask your payday lender for an extended payment plan for an additional fee. Terms may vary by lender and state, but this will allow you to make fixed payments over a longer term to pay off your debt.
  • Debt Management Plan: Debt management plans (DMPs) are a type of nonprofit payday loan consolidation offered by credit counseling agencies. You don’t need to apply for a new loan, so this is a good option if you have poor credit. You’ll make a single payment each month to the credit counselor, which will be distributed to your lenders.
  • Borrow From Friends or Family: Your friends or family members may be able to offer payday loan help. We recommend making a loan agreement before you borrow to avoid any misunderstandings later.
  • Debt Settlement: If you have a significant amount of high-interest-rate debt ($10,000 or more) from payday loans, credit card debt, short-term loans, cash advances, and title loans, debt settlement will allow you to reduce the amount you owe and settle your accounts.
  • Chapter 7 Bankruptcy: You may be able to get all or some of your unsecured debts discharged through a Chapter 7 bankruptcy if you pass the means test. We recommend consulting a bankruptcy lawyer since this legal process can have a significant impact on your finances and credit.  

Payday Loan Consolidation Can Make It Easier to Get Out of Debt

Payday loan consolidation is a good option if you want to get out of a high-interest debt cycle. Compared to payday loans, consolidation loans come with lower fees and interest rates. The longer term gives you a manageable monthly payment.

Before you borrow a payday consolidation loan, it’s important to compare your loan offers to get lower rates and ensure you’ll be able to afford the monthly payments. It’s also best not to take on any more debt while you’re repaying the loan since it can make your financial situation worse.

Keep in mind that there are other debt-relief options for payday loan borrowers who don’t meet the eligibility requirements for a consolidation loan, such as debt management plans, nonprofit credit counseling services, and debt settlement.