Payday loan consolidation with a personal loan: Should you do it?

Unhappy young girl sitting on steps outside and textingImage: Unhappy young girl sitting on steps outside and texting

In a Nutshell

Payday loans usually come with high fees and unfavorable terms that can keep consumers trapped in a vicious debt cycle that’s difficult to break. Consolidating payday loan debt into a personal loan can help break the cycle and provide much-needed financial relief.
Editorial Note: Credit Karma receives compensation from third-party advertisers, but that doesn’t affect our editors’ opinions. Our third-party advertisers don’t review, approve or endorse our editorial content. It’s accurate to the best of our knowledge when posted.

Personal loans offer many advantages over payday loans, including lower rates and fees, predictable monthly payments and flexible loan terms.

Payday loans may seem like a quick and easy solution if you need fast cash. But the way they’re structured keeps many consumers stuck in a cycle of repeatedly paying additional fees to renew the same loan.

As a result, consumers frequently pay more in fees than the original amount they borrowed. The average payday loan recipient is in debt for five months, spending $520 in fees to borrow $375, according to a 2016 Pew Charitable Trust analysis.

If you’re stuck in the payday loan cycle, consolidating your debt into a personal loan may help you break free.

Let’s explore how the process works, the benefits of a debt consolidation loan, the requirements for obtaining a personal loan, and alternative ways to get payday loan relief if a personal loan isn’t right for you.

How payday loan consolidation works

Debt consolidation loans are designed to combine multiple high-interest loans — like payday loans and other types of unsecured debt — into a single loan with a lower interest rate. This can reduce your interest charges each month and help you pay down your debt more quickly.

If you’re ready to get out of the payday loan trap, consolidating a payday loan into a personal loan may be a good option … and it’s a pretty simple process.

First, you apply for the loan. When completing your loan application, you’ll typically have to provide a variety of personal and financial information along with documents like recent pay stubs, W-2s, tax returns, utility bills or a copy of your driver’s license. Specifics depend on the lender.

If you’re approved, you can use the funds from the personal loan to pay off the payday loan. Then you’d repay your personal loan according to the loan terms.

If your goal is to eliminate payday loan debt, it’s a good idea to review your finances before you apply for a personal loan and create a plan that will help you stay on track and debt-free. Otherwise you may find yourself caught in a cycle of borrowing and struggling to repay your debts again. 

Benefits of payday loan consolidation

Consolidating your debt into a personal loan can help you manage it more effectively. Here’s how.

Lower fees

Personal loans often have lower interest rates than payday loans. A payday loan can have fees that equal an APR of almost 400%. But interest rates for personal loans typically range from 5% to 36%, depending on the lender. 

Flexible repayment terms

Unlike payday loans, which usually must be repaid within two to four weeks, personal loans offer a variety of repayment terms that generally range from 12 to 84 months. You can choose the term that works best for your budget.

Predictable monthly payments

When you consolidate your payday loans into a personal loan, you’ll make a single monthly payment to repay your debt. Your monthly payment stays the same until you’ve paid off the loan in full.

Your ability to pay matters

Unlike payday loan lenders, financial institutions that extend personal loans care about your ability to repay the loan. Because the lender needs to be reasonably confident you can pay back the amount you borrow, you’re less likely to be granted a loan you can’t afford.

You can’t roll over or renew your loan

Personal loans are installment loans, which means you borrow a fixed amount of money and pay it back, with interest, in monthly installments over the life of the loan. When your loan is paid in full, your account is closed. If you need more money, you must apply for a new loan. You can’t renew a personal loan by paying only the fees and not paying the balance, like you can with some payday loans.

Learn more: Credit Karma Guide to Debt

Is a personal loan right for you?

Qualifying for a personal loan will probably be tougher than qualifying for a payday loan, and the minimum loan amounts may be higher. You also may not be able to get your money as quickly.

Here are a few things you should know to help decide if applying for a personal loan for payday loan consolidation is right for you.

  • Think about minimum loan amounts. Loan amounts vary by lender. But the minimum loan amount for a personal loan is usually around $1,500, which is higher than the minimum amount for a payday loan. If you don’t need that much money, you may end up borrowing more than you need with a personal loan. But many personal loans don’t have prepayment penalties — so if you have the extra cash, you can pay back the loan early.
  • Check your credit scores. Unsecured personal loans are granted based on an applicant’s creditworthiness, which means lenders will perform a credit check before deciding if, and how much, to give you for a loan. If you don’t qualify for an unsecured loan, you may be able to get a secured personal loan instead.
  • Prove you can repay your loan. Unlike payday lenders, which typically require just a checking account and a paycheck, most financial institutions require proof that you’ll be able to repay your loan on time. If your income is too low, or your debt is too high, you may not qualify.
  • Consider how fast you need the money. If you need money immediately, you may not be able to get it from a personal loan. While some lenders may be able to fund your loan within a day or two, others can take longer. The length of time it takes to receive the funds from a personal loan varies based on the lender and your individual circumstances.

Other debt relief options

If you need payday loan help but can’t get approved for a personal loan, there are other debt relief options. Here are a few to consider.

Ask about an extended repayment period

In some states, payday loan lenders allow borrowers to extend the repayment period past their next paycheck and repay the loan in smaller increments. You can ask your payday lender if that’s an option. But beware that you may have to pay an additional fee.

Work with a credit-counseling service

Credit counselors are generally trained to help consumers with many aspects of their financial lives, including budgeting, debt management and consolidation programs. They can work with you to examine your entire financial situation, identify areas for improvement and help you create an individualized plan to pay down your debt. If you decide to work with a credit counselor, make sure you choose someone from a reputable organization. The Federal Trade Commission also recommends working with someone who offers in-person counseling, whenever possible.

Speak with a legal aid attorney

Legal aid offices provide free legal advice to low-income individuals. If you qualify, they may choose to work with you for free. Legal aid attorneys can help you understand your debt-settlement rights and explore your legal options based on your personal situation.

Bottom line

Consolidating your payday loans into a personal loan can be a wise money move if you’ve weighed the pros and cons for your particular financial situation and you qualify for this type of loan (and at a favorable interest rate). If not, other debt-relief options may be better for you.

About the author: Jennifer Brozic is a freelance financial services writer with a bachelor’s degree in journalism from the University of Maryland and a master’s degree in communication management from Towson University. She’s committed… Read more.