Comparing the Pluses and Minuses of Payday Loan Consolidation

It is very common for borrowers to seek payday loan consolidation if they have had to take a number of cash advances in the process of meeting financial demands. Since payday loans have high interest rates, many borrowers get into a cycle of debt that requires they take multiple loans in a short period of time. Consolidating these loans into one debt may be the best option, but it can also cause more financial stress than it relieves.

Pluses of Payday Loan Consolidation

• Manage monthly payments--It is much easier to manage one payment each month instead of the three or more you may have with your current system. Payday loans in particular accumulate quickly, and it is common for a borrower to have ten or more debts to pay in a month. This makes the risk of missing a payment higher. With consolidation, you will take a new loan that covers the sum of all your previous debts. In the future, you will be responsible to only this new loan and one payment each month. Consolidating this into one payment can lower the risk you will miss a payment on one of the debts.
• Steer clear of payday lenders--In most strategies, you will be consolidating your loans with a third party lender instead of with another payday lender. Ideally, this new lender will be a lower risk lender, meaning your debts will have lower interest rates and lower financing fees. Instead of keeping the debts with the payday lender, running the risk of more fees, you can close your relationship with this lender permanently.

Minuses of Payday Loan Consolidation

• No settlement options--Payday lenders rarely allow you to settle a debt. If they feel you will eventually be able to pay, they would rather continue to extend you financing at interest in order to keep your loan alive. Traditional lenders would be more likely to help you negotiate your way out of the debt permanently. Payday lenders have a lot to gain by keeping you on the hook, so they may reject your attempt to settle the debt for anything less than full price.
• Credit problems--Your credit may already be so far compromised that you are not concerned over the implications of consolidation to your credit score. If you are looking out for your credit, though, payday loan consolidation will be a large blow. Most payday lenders do not run credit checks before financing your loan. They will also neglect to report the debt to credit bureaus under the majority of circumstances. This means the debt will have absolutely no impact on your personal credit. However, if you consolidate with a more reputable lender, the lender will run a credit check. The debts will be added to your credit score, and your credit will drop as a result of the increase in debt on your record. Future lenders will be particularly concerned if they discover you previously sought payday loans.

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