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Payday Loan Consolidation: How Does it Work?

Let’s say you need to get a product you always wanted to buy or need, but it's available for a limited time only. Or, maybe it is an emergent situation where you must make the purchase, like buying a new laptop because your current one broke.

Whether you have a well-made financial plan or not, unexpected purchases can come up that might badly disbalance your regular budget. In such a situation, a short-term loan, like a payday loan, feels like a savior. You can get this type of loan in an instant in moments of cash crunch and pay it back when the next payday rolls around.

However, you are at a bigger risk if you miss paying off these loans on time. It might become more expensive to pay off your payday loans if you develop a habit of pushing off your payment dates as the interest will keep adding up. Statistics show that almost 1 out of 4 payday loan borrowers repeat the borrowing cycle nine times or higher. Therefore, they end up paying more than they originally borrowed.

In such a situation, payday loan consolidation would work as a good solution for you to get out of this debt trap. This article will cover all that this strategy entails in more detail.

What is Payday Loan Consolidation

The problem with a payday loan is that it can swiftly turn into a debt trap for the borrower. Payday loans come with high annual percentage rates (APR) between 391%-600% and smaller gaps between payments. So, borrowers can easily fall into major high-interest debt if they continue taking out new payday loans to pay off the fees of the previous one.

Payday loan consolidation is the debt relief strategy of combining multiple present payday loans into one. Then, using a single, new personal loan at a lower interest rate, the debtor can pay off the full debt in many installments.

When you consolidate payday loans, you can expect an easier experience getting rid of this debt since you will get a longer repayment timeline. Plus, instead of paying down each one to the payday lenders, you can focus on paying off just this debt consolidation loan.

How Does the Payday Loan Consolidation Process Work?

In the context of how a payday loan consolidation works, there are certain factors that are common across the board. The average interest rate of this loan is typically low, and the set repayment period is long, like 12-84 months. As for how to consolidate payday loans, you can go forward with the following sequence:

Step 1: Review your existing payday loans and tally up the total outstanding balance, including the origination fees from your new lender.

Step 2: Check your current credit score to see if you qualify for a new loan.

Step 3: Browse through different debt consolidation loan offers, focusing on the loan terms, interest rates, etc.

Step 4: Submit your loan application form to the offline or online lender offering you a consolidation loan. In most situations, the lender offering the debt consolidation loan will immediately pay off the payday loan debt to the lender after the loan approval goes through. However, some lenders may not provide this service. You will need to pay down the payday loan debt after receiving the loan amount.

Step 5: Activate the autopay feature for on-time repayment, if available.

Is Consolidating Payday Loans a Good Idea?

If you are wondering whether you should consolidate your payday loan, the answer can vary from person to person. It depends on people's financial goals and economic conditions, as payday loans work best for those who can make timely repayments.

As discussed, payday loans generally come with very high, triple-digit annual percentage rates. Personal loans, on the other hand, have smaller interest rates, but you will have bigger principal amounts with them. If you only need a smaller cash advance, it makes no sense to take out a big loan. A short-term loan type payday loan is easily the better option. However, given the risk of high-interest debt with payday loans, you are at a higher risk if you cannot repay the loan amount on time.

If you consolidate your payday loans, you will have the combined total of all your existing payday loans as the principal. Then, you need to pay off this amount at a lower interest rate for a more extended repayment period. Unlike taking another unsecured personal loan, the repayment timeline with payday loan consolidation will be smaller and easier to keep up with. But if you also miss making payments towards the consolidation loan, you might still fall into a debt cycle. So, keep that in mind.

You should review the benefits and drawbacks of consolidating payday loans in more detail to determine whether it is a good idea or not.

Pros and Cons of Payday Loan Debt Consolidation

There are both positives and negatives to using the payday debt consolidation method to eliminate this high-interest debt.


Here are the benefits.

Low feesSome payday loan consolidation companies charge origination fees, but this is typically 1%-10% of the total loan amount. So, it is relatively low.
Consistent terms of repaymentYou will experience freedom from dealing with unpredictable repayment amounts each month, which would usually add to your stress. Instead, you can make your payments at a fixed interest rate consistently throughout the repayment timeline.
Longer repayment periodYou can expect a straightforward repayment cycle of 1-7 years with set monthly payments.
No rolloversWhen you repay the full due, your payday loan lenders will close your account.
Better creditCredit bureaus will get the report when you make on-time payments towards the outstanding payday loan debt. So, if you make consistent, on-time payments, your credit score will improve.


The following are the main cons of payday loan debt consolidation.

EligibilityIt is not guaranteed that you will qualify for a loan offer with a low-interest rate. Borrowers can opt for payday debt consolidation loans with interest rates between 6%-36% depending on their creditworthiness.
Temporary reliefThis debt relief strategy will help you fully pay off the initial loan amount. However, if you continue to spend more than you earn, you might fall into debt again.
Longer timelineWhile a longer repayment timeline will give you ample time to pay off your payday debt, it also implies you will stay stuck in this debt cycle for years.
Paying more on interestIn spite of the lower interest rate of your payday consolidation loan, you might end up paying more on interest over time. That is because the repayment period will likely stretch over years.
Reduced borrowing opportunitiesIf you have a history of payday loan consolidation, you may qualify for fewer high-value loan offers in the future. Many lenders tend to avoid borrowers with a history of bad credit.

Additional pros:

  • Experience less stress: It can get frustrating to continue paying off one loan payment after another, especially with short repayment periods and high rates. But when you adopt this strategy for payday loan debt relief, you can expect a comparatively simpler repayment process.
  • Find more financial resources: After you consolidate your payday loans, you may find access to other resources like lines of credit, personal loans, etc., with better loan terms.

Additional cons:

  • Default risk: In case you miss making payments on the consolidation loan, you may face default risk. That will have further serious consequences, like a huge impact on credit history, activation of collection calls, etc.
  • Risk of scams: You may come across predatory lenders or scams when searching for payday loan consolidation. They are not always easy to identify, so it is important to proceed carefully.

Is It Possible to Consolidate All Payday Loans at Once?

Yes, you can consolidate high-interest payday loans all at once if you have taken more than one. You need to check and tally up all of your balances and apply for a consolidation loan for the total amount at a lower interest rate. Shop around different consolidation loan options and see if you pre-qualify for any offer from debt consolidation lenders, either online or offline.

For example, let’s say you took a payday loan of $500 at 400% APR first, with the due date set 14 days after it. Then, you miss the payment on the next payday, so you get a new loan of $700 at 350% APR, with a repayment term of 1 month. When you miss this payment again, you get another payday loan of $600 at 300% APR, promising to pay it within 14 days. However, at this point, you are deep into the payday loan debt cycle and are struggling to complete the payments.

Then, if you take a debt consolidation loan on this total amount, i.e., $1800 at a lower interest rate of 25% APR, you only have to make single monthly payments. If the repayment term for this consolidation loan is set at 6 months, you can make the total payments easily in smaller installments.

If you make individual monthly payments of all your payday loans, your total expense will rack up to a high amount. Instead, with a debt consolidation loan, you can pay off your payday loans with just one monthly payment of $300 approximately within the expected timeline.

When Should You Consolidate Payday Loans?

If you are wondering when payday loan debt consolidation is appropriate to use, certain situations come to mind. Here are the potential scenarios where this strategy works best:

  • You cannot afford to pay hefty interest rates: Payday loans generally have extremely high rates, with an average APR of 400%. So, when you repay the loan amount after missing the initial payment date, you will pay more in interest. If you are already living paycheck to paycheck and struggling to pay these amounts, you should consolidate your payday loans.
  • You want a more straightforward repayment plan: You may have different repayment terms for all payday loans you take. Keeping up with timely payments for each one can get challenging, so naturally, one might miss payments. To avoid this unpredictable payment cycle, you can switch to a consolidation loan to pay off all your payday loans with set monthly repayments.
  • It is not possible to roll over any more loans: Lenders may not allow you to continue rolling over your outstanding balance after some time. Or, if you are going through a financial crisis, like job loss, you might not have enough funds to make loan payments. You can consolidate your payday loans if you cannot roll over any more dues.
  • You cannot stop lenders from withdrawing funds from your account: If you have set up autopay for payday loans, the lender will withdraw funds directly from your bank account on due dates. If you want to stop these automatic payments, you can consolidate all payday loans and make single payments as per new terms.

DIY Payday Debt Consolidation: Can You Consolidate Payday Debt on Your Own?

Yes, you can consolidate your payday loans by yourself. However, this move involves a lot of risk, so you should proceed cautiously.

For one thing, the payday loan market is not free of scammers or lenders who engage in predatory practices. When trying to find DIY consolidation options, you may encounter fake offers or programs. Besides that, even if you find credible lenders, you may be unable to convince them. Not every lender will agree to change your repayment terms, extend time, or reduce rates.

Proper discipline and adequate financial knowledge are necessary to build an effective budget plan to repay payday loans fully. With good preparation, you can negotiate with your lender, and staying wary will help you avoid scams.

For example, you can identify them by what benefits they promise, like unreasonably quick/instant loan approval, no credit check needed, etc. So, if you find a too-good-to-be-true loan offer, avoid it altogether. Also, carefully research lenders, go through the terms and conditions and read reviews from credible sources first before signing any loan agreements. As for negotiating with lenders, you can take the help of a professional debt relief expert or credit counselor to restructure your repayment plan.

If you are planning to go forward with DIY payday loan consolidation, you can find many resources to support you with the process. For example, you can refer to the comprehensive guide from the Consumer Financial Protection Bureau on debt repayment planning and negotiating with lenders. Plus, you can use debt management apps like YNAB or Mint for expense tracking and realistic budget planning.

Does Payday Loan Consolidation Hurt Your Credit?

Payday loan consolidation might improve your credit score, but it can also damage it. It depends on how you proceed with this program.

In the beginning, lenders might run a hard credit check on you when you apply for a new loan. So, naturally, your credit score will drop to some extent. On average, you can expect a 5-point drop in your FICO score or lower. But this only occurs temporarily.

Payment history as a category constitutes 35% of the FICO score. So, timely payments will allow you to build credit over time.

Discover the answers to your payday loan consolidation questions in our informative FAQ article.

Payday Loan Debt Relief- Alternatives to Consider

There are multiple ways in which you can get out of payday loan debt with any payday lender besides payday loan consolidation. For an easier understanding, here is a breakdown of the types. Depending on your current financial situation and amount of debt, you can select the best option for you.

Debt Management Plans (DMPs)

What it involvesRestructuring the repayment plan in a manageable manner for outstanding debt payoff
EligibilityYou need to show proof of financial strain; eligibility can vary depending on financial status, location, etc.
ProcessWith the help of a credit counseling agency, you will undergo a full financial assessment. The credit counselor in charge of your case will negotiate with creditors for a modified repayment plan that fits your financial condition. You will make single monthly payments per the negotiated plan to the credit counseling agency, which will further distribute funds to lenders.
  • Get a structured and reasonable repayment plan
  • Make one monthly payment, which the credit counselor will redistribute to creditors
  • Hard to convince lenders
  • Limited flexibility

Payday Loan Debt Settlement

What it involvesNegotiate with payday lenders directly or with the support of a debt settlement company to settle your debt for a lesser amount than originally owed.
EligibilityPeople with low/inactive sources of income
ProcessCheck for your eligibility for debt settlement and start saving for loan resolution. Consult with a debt settlement company and negotiate with lenders for a settlement plan suitable to your payment capacity.
  • Make one lump sum payment to settle your payday loan debt
  • You will pay off a smaller amount than the full due
  • Collection efforts may continue even during an active negotiation process.
  • Potential harsh impact on your credit score.

Learn more about how debt settlement works

Extended Payment Plans (EPP)

What it involvesExtending the repayment period after negotiating with payday lenders directly, at zero extra fees.
EligibilityFor borrowers with stable income who can pay off payday loans completely with a longer repayment term. Those who have taken less payday loans.
ProcessContact your payday lender and request an extended payment plan. If they offer such plans, review all terms and then sign the loan agreement if acceptable. Make timely payments.
  • Get a more flexible repayment plan.
  • Avoid defaulting on your payday loan debt.
  • Not all payday lenders accept EPPs for borrowers.
  • Extra fees may apply.

To learn more about payday debt consolidation, check out this informative report from the Consumer Financial Protection Bureau:

“The report provides insights into how payday loan extended payment plans work and how consumers are using them to manage their payday loan debt.”

Payday Alternative Loan

What it involvesAn alternative short-term loan to payday loans with a longer repayment timeline and lower interest rate
EligibilityMembers of federal credit unions with low income can qualify.
ProcessIf you are a member of a federal credit union under NCUA (National Credit Union Administration), you can borrow $2,000 or less. Present relevant documents for proof of income (e.g., tax returns, pay stubs), ID proof (passport, driver’s license), etc. Apply for the PAL offer if you qualify and wait for a full financial assessment. If approved, you will get the new loan terms and funds for repayment. Repay as per the decided terms.
  • Interest rates available up to 28%
  • Repayment term within a month to a year
  • Not all federal credit unions offer this benefit
  • Only applicable to people with federal credit union membership

To learn more about payday alternative loans


What it involvesFile for Chapter 7 or 13 bankruptcy to discharge all unsecured payday loans instantly if all other methods fail.
EligibilityShow that your disposable income is below the median income level.
ProcessYou have to file a petition for bankruptcy after assessing your finances, consult with a credit counselor, and choose a type of bankruptcy. The court will check your financial records (expenses, income, secured/unsecured debt status). The court imposes an automatic stay on your finances, and you have to attend the 341 meeting/creditors meeting. If approved, the court confirms the bankruptcy discharge at the end.
  • An automatic stay becomes active on your outstanding debt after you file for bankruptcy.
  • Works to remove all/partial payday loan debt if you list it as unsecured debt.
  • Bankruptcy works for debt that is dischargeable within the last 60-90 days- difficult to apply to payday loans.
  • It will stay in the credit report for a long period.

Keep in mind that some debt relief companies charge high costs for services or promise instant debt relief. So, go through each option carefully. Take the help of certified financial planners for more guidance before selecting the right payday loan debt relief strategy for you.


Payday loans can be handy in times of cash crunch, but they are risky. If you have multiple payday loans, you can combine them into one amount and take a new loan to pay off this total. The payday debt consolidation method is easy to handle, with a longer repayment timeline and lower interest rates. However, if you miss timely payments on this loan or repeat your bad financial habits, you will struggle more.

So, prepare a manageable budget and use that to manage your overall expenses alongside your debt repayment. Choose a suitable debt relief strategy, whether debt consolidation or an alternative option, that you can work with.

For the best experience and to avoid further issues, you can seek professional financial guidance for payday loan help.

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