Payday loan debt got you down? Can’t figure out a way to get rid of this termite eating away your savings? The good news is that with debt consolidation, you can quickly get out of this debt trap without paying a high interest rate on your payday loan. Read on to know if it’s for you or not.
What’s Payday Loan, and What’s the Role of Debt Consolidation in it?
Those who want to get a small loan (a few thousand dollars) instantly without a credit check opt for payday loans. The borrower receives the loan against their monthly paycheck, and the principal is deducted from the borrower’s income. The good thing about a payday loan is you get cash in hand immediately to take care of your urgent financial needs. Learn more about debt consolidation here.
However, the annual percentage rate (interest) of a payday loan is VERY HIGH – up to three digits in most cases. So it can be an uphill battle to get out of this kind of debt. And when people find it challenging to repay the payday loan, they open up a new payday loan to pay the first one – also known as rolling over the loan.
But the problem is; the overall repayment amount increases, sending the borrower further down the bottomless pit of debt. This is where debt consolidation comes into the equation.
With the help of payday loan consolidation, borrowers merge their payday loans with high interests into a single loan payment plan with much lower interest and flexible payment terms (depending on your credit score). Here are a few benefits of debt consolidation for payday loans.
- Low APR: As mentioned above, payday loans have a very high APR (annual percentage rate), typically in three figures (400% to 500%). So consolidating your payday loan(s) into another type of loan (discussed below) would mean significantly lower APR.
- Longer Terms: With short-term payday loans, you need to make full payment in two weeks, which can be difficult for many, especially when there’s a three-figure APR attached to it. Therefore, getting a different loan to pay the payday credit is a good idea. Besides a lower interest rate, it’ll also have longer payment terms – several months or even years.
- Avoiding Wage Garnishment: If you fail to repay the payday loan, the lender can take the matter to court, resulting in wage garnishment (amount of your wage deducted before you get paid and sent to the lender).
So, Can Debt Consolidation Help Me With Payday Loans?
Yes, and the best part is, there are more than one debt consolidation options for payday loans, so depending on your circumstances, you can go with either of them. Here are the four most common ones with their pros and cons:
Credit Union Loan:
This one may or may not be for you as it depends on whether there’s a credit union in your region and what’s your history with it. If you’re a credit union member, you can simply get a small loan from them at easy instalments and a low interest rate. You can then use it to pay off payday loan debt and then start paying the credit union loan.
- You can choose the amount of loan from a few hundred to a few thousand dollars
- Since a credit union is a non-profit organization, the interest you pay is distributed to all union members in the form of dividends and other financial benefits.
- Lower interest rate than your existing payday loan APR
- You need to be a member of the union to get a loan
- May have a little higher interest rate than a bank
It’s your typical loan where you borrow a fixed amount of money to pay back over a decided term at a determined interest rate. However, there might be some fee associated with the loan, so make sure to find out about that.
- Payment terms and APR are usually fixed, so the monthly payment amount won’t change as long as you make them in a timely manner
- You can get funds fast, sometimes even within a week
- You don’t have to add any collateral; this is an unsecured loan
- Borrowing a low amount may result in a high APR
- There may be some organization fee that can be from 1% to 10% of the borrowed amount
Interest-Free Credit Card Loan
Many credit card providers in Canada have promotional offers of 0% APR for a specific period, typically 12 to 18 months. You can get the loan from the credit card, pay off your payday loan using it and then pay regular instalments for this new loan at 0% interest.
- You can get an introductory offer of a 0% interest loan, which means significant savings on interest rate
- No need to provide any collateral; it’s also an unsecured loan
- You need to have a good credit score to get approved for this loan
- If you don’t pay the monthly instalments on time, the remaining amount might get some interest levied on it. So make sure to have a payment plan in place before getting this loan.
Home Equity Loan:
This is where you get credit against the equity of your home. If you’re a homeowner, you can get a home equity loan – the amount remaining after deducting the mortgage from the total value of your property.
This way, you can pay off the payday credit, and start making lower interest payments for the home equity loan. And don’t worry, once you repay all the outstanding balance, you’ll get your property ownership back.
- Significantly lower interest rate than a payday loan
- Flexible and long term payment terms
- The interest rate is typically fixed as long as you make timely payments
- A part of your property will be used as collateral
- Not a good idea if you’ve got a lot of outstanding mortgage amount
There are multiple options to pay off your payday loan and save a significant chunk of money on the high APR that comes with it.
However, before going with any of the aforementioned options, either consult with an expert or make sure you will have enough money to pay the monthly instalment of the new consolidated loan.