Payday Loan Consolidation: What Are My Best Options?

Payday Loan Consolidation
Key Takeaways:
  • Payday loans have very short terms and extremely high interest rates and fees.
  • Payday loan consolidation can save you money if you can get a loan with better terms.
  • Payday refinance loans can give you more time to repay and a lower interest rate.

Payday loans are expensive short-term forms of unsecured debt that trap you if you can’t pay them off immediately. Payday loan consolidation might help you escape that trap.

This article explains payday loans and why they can harm your finances. It also describes types of payday loan debt relief, including payday loan consolidation. 

Topics covered by this article include:

  • What is a payday loan?

  • What is payday loan consolidation?

  • How does payday loan consolidation work?

  • Pros and cons of payday loan consolidation

  • Alternatives to payday loan consolidation

  • Payday loan consolidation: FAQs

What Is a Payday Loan?

The idea behind payday loans is that they work like an advance on your next paycheck. 

That means they are very short-term loans designed to be repaid on payday. They usually don’t require a credit check, but you do need a job and a checking account. According to the Consumer Financial Protection Bureau (CFPB), they are normally for amounts of $500 or less. 

They are often offered by small, local institutions and are also available online. These are not traditional lenders like banks or credit unions. Instead, they are businesses catering to consumers with no credit or bad credit, which many traditional lenders ignore.

Payday lenders profit from dealing with high-risk borrowers in two ways. First, they secure a means of repayment upfront. Second, they charge a relatively large fee for making short-term loans. Payday loans are an extremely expensive form of borrowing; in many cases, the APR (annual percentage rate) exceeds 300%!

Payday loan lenders get repaid by having you write a post-dated check for the full amount of the loan plus fees. The payday loan lenders then cash that check on your next payday to automatically collect their money. 

Or, instead of a check, the lender might get authorization to withdraw the amount owed from your account electronically. However repayment is handled, there is a fee on top of the amount you borrowed. That fee is how payday lenders make their money. 

Problems with Payday Loans

If payday loans help people with a poor credit record get access to loans, what’s the problem?

The main problem is cost. 

Because payday loans have such short terms, lenders take a flat fee rather than a percentage interest rate. According to the CFPB, payday lenders typically charge between $10 and $30 for every $100 loan. A $15 fee is common.

A $15 fee to borrow $100 for two weeks equals an APR of nearly 400%. What makes that high annual rate especially relevant is that borrowers often find themselves taking multiple payday loans and renewing them over and over.

Each time borrowers renew, they pay a fresh loan fee. In effect, they keep borrowing the same amount and pay another fee every time. If they do this for a year, it would cost $390 to borrow $100 -- plus the original $100 principal loan amount.

Again, that comes to an annual interest rate of nearly 400%. To put that in perspective, the average interest rate charged on credit cards is 16.65%, according to recent Federal Reserve data

The extreme cost is why some states cap the size of the fee payday lenders can charge. Other states ban this type of loan altogether.

What Is Payday Loan Consolidation?  

A $15 fee here or there isn’t going to do too much harm. But for payday loan borrowers who have to continually roll over their payday loans because they can’t afford to repay the principal, these can add up to a lot of money. 

Of course, paying those high fees over and over makes it hard to ever pay back the original amount owed. That’s how payday loans can quickly turn into a cycle of high fees and continual debt. 

Payday loan relief can break that cycle. 

Payday loan consolidation involves paying off expensive payday loans with an installment loan at a lower interest rate.

  • By replacing multiple payments with a single monthly installment payment, borrowers have fewer loans to track. 

  • A payday debt consolidation loan can save money if the interest rate on the new loan is lower than the payday loan.

  • A debt consolidation loan can provide a lower monthly payment and more time to pay off the loan balance.

How Does Payday Loan Consolidation Work?

Payday loans are ideal targets for loan consolidation because their interest rates are so high. If you can consolidate payday loans with a personal loan, it is likely to have a much lower interest rate. 

Besides saving you money, a personal loan offers a payment schedule designed to pay the loan off over time. That breaks the cycle of rolling over payday loans. 

You use the personal loan to pay off your payday loan debt and any other debts with higher interest rates. If you have trouble qualifying for an unsecured personal loan with a low interest rate, consider applying for a secured loan. 

Pros and Cons of Payday Loan Consolidation

Loan consolidation can be a helpful tool if it is used correctly. Like any other financial tool, it has its pros and cons. 

Understand the pitfalls of a debt consolidation loan before applying. Here are some advantages and disadvantages of payday loan consolidation. 


  • Personal loans generally cost a lot less than payday loans. So, more of your future paychecks can go towards paying off what you owe instead of towards an endless string of loan renewal fees.

  • A personal loan provides a clear repayment schedule, instead of drawing you into an open-ended cycle of borrowing.

  • A traditional lender is more likely than a payday lender to report your payments to a credit bureau. That means a personal loan can help you improve your credit record if you keep up with the payments. 


  • If you have poor credit, it is harder to get a personal loan. You may have to add a co-signer or find collateral for a secured loan.

  • Personal loans can be fairly expensive for borrowers with credit problems. There may be a combination of fees and interest charges involved, so be sure to add up what the total cost would be before agreeing to any loan.

Even for borrowers who don’t have great credit, a personal loan can be a much cheaper option than payday loans. That makes it well worth shopping around for a lender who will give you the right loan to consolidate your existing debts. Avoid ads for “personal loans with no credit check,” however. Those are just sneaky ads for more payday loans, Ditto for auto title loans – they are just expensive traps secured by your car.

Don’t go into a new loan just hoping everything will work out. Once you see what the repayment schedule will be, create a budget to make sure you’ll be able to make the payments. 

Alternatives to Payday Loan Consolidation

If you are unable to find a personal loan to pay off your payday debt and can’t keep up with your payments, you may have to find a more drastic solution. 

Debt management

Debt management is a plan offered by credit counseling firms; a credit counselor sets up your debt management plan and you make a single monthly payment. Your counselor distributes that payment among your creditors. Credit counseling can also help you with budgeting, and your counselor may be able to get you better repayment terms and other payday loan help.

In a debt management program, a credit counselor can: 

  • Help you organize your payments

  • Negotiate more favorable repayment terms from your existing creditors

  • Help you find more cost-effective alternatives to your current debts

There is likely to be a fee for this service. However, that fee may be well worth if it helps you stop your dependence on payday lenders. 

Debt settlement

Debt settlement or debt relief programs go a key step further than debt management. It involves negotiating with creditors to reduce the amount you owe. 

Getting creditors to agree to this is difficult, but they may be willing if they are convinced you won’t be able to pay the full amount of your debts. In that case, accepting a partial payment upfront might be better for them than a long, drawn-out process with an uncertain outcome.

One drawback of debt settlement is that it creates an unfavorable record on your credit report. 

There are also likely to be costs involved. You are likely to have to pay a percentage of the reduced debt as a fee for the debt settlement service. Also, debt written off may be viewed by the IRS as taxable income – the IRS has an insolvency worksheet that can tell you if the forgiven debt would be taxable income.


Bankruptcy is a legal process in which a judge dictates how you will pay your unsecured debts. With Chapter 7 bankruptcy, you surrender your assets in exchange for having unsecured debt wiped away. With a Chapter 13 bankruptcy, you have to pay some or all of your unsecured debt over three to five years by making a monthly payment to the bankruptcy court.

On the plus side, bankruptcy gets debt collectors off your back and can help you become debt-free. However, bankruptcy requires you to make your financial problems public. Filing bankruptcy can even make you ineligible for certain careers.

Also, bankruptcy can stay in your credit history for up to ten years. That can make it very difficult to get credit for some time. 

Frequently Asked Questions

Will consolidating my payday loans hurt my credit score?

This could go either way. Payday loans are often not reported to credit agencies, so it’s possible taking out a consolidation loan could hurt your credit score. However, if a debt consolidation loan makes it easier to pay your bills on time, it should help your score in the long run. 

How can I qualify for a debt consolidation loan?

Obviously, it helps to have good credit, but some lenders will consider higher-risk borrowers. It helps if you can demonstrate a steady job with enough income to repay the loan. If all else fails, your best shot may be to find some collateral to use as security against the loan. Plus, you’d have the consolidation loan payments to make. 

Can I still borrow from payday lenders after I consolidate my existing debts?

This probably isn’t a good idea. While payday lenders would probably still loan you money, this would only put you in worse shape than before. You’d be back to paying those high loan fees over and over, plus you’d have the consolidation loan payments to make.