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Payday Loan Debt Consolidation – Pay Off Payday Loans

How can you pay off a payday loan or a bunch of payday loans? Learn about your options including payday loan debt consolidation.
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Written by Gina Pogol
Financial Expert
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Managing Editor
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Why do people take out expensive payday loans?

Most people know payday loans or check advances are not the best way to borrow. And yet so many make this mistake because:

  • They are too scared or too embarrassed to try other options
  • Some don’t believe that other sources will be fast enough
  • Others fear that they won’t qualify for a better loan

And once they are in the trap, payday balances can be very hard to pay off.

If you owe money to a payday lender, you have options. Payday loan debt consolidation is one of those options.

See payday consolidation loan rates

How Payday Loans Work and Why They Are So Bad

Payday loans are bad because they turn out to be a lot more expensive than they first appear.

Payday loan charges might look reasonable if you’re trying to get out of a jam with a short-term loan. The loan fee might even be less than the cost of a bounced check. But a bounced-check fee is a one-time charge, while payday loan costs increase the size of the debt faster than many can repay it.

Here is the typical structure of a payday loan:

  • You want to borrow $500
  • You write the lender a check for an amount ranging from $575 to $650, depending on the lender (payday loan fees run 15% to 30% of the amount borrowed)
  • The lender cashes the check in the future, usually on the date of your next payday

The problem is that few who borrow this way can repay the loan in two weeks or less.

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How Much Do Payday Loans Cost?

It costs $15 to $30 to borrow $100 for two weeks.

That might not seem like much. But the actual interest rate on a yearly basis is between 391% and 782%. The reason payday loans are so sneaky is that borrowers only see the fees in terms of dollars, not percentages. And they don’t realize that they will probably not be able to pay off the loan when it comes due.

What happens when a payday loan is due and you don’t have the money to repay it?

The lender is happy to roll it over into a new one. Let’s assume that it cost you $600 to borrow $500 ($20 per $100 borrowed, a 521% annual percentage rate) but you don’t have the money to pay it back in two weeks.

  • Your lender rolls the amount owed into a new loan. With a new set of fees.
  • It costs you $720 to borrow the $600.
  • So now you have to pay back $720 when you only received $500.
  • Roll over that loan two more times and your fees will exceed the original loan amount. In eight weeks or less you will owe over $1,000.

According to the Consumer Financial Protection Bureau (CFPB), 80% of payday loan borrowers had to roll their loans over at least once. But it gets worse – roughly 50% of those who rolled over renewed their loans more than ten times!

Where to Get a Personal Loan

How to Pay Off Payday Loans

You might have become trapped in a series of payday loans because of an emergency. But you might be able to get out of your payday loans with one or more of the DIY or professional options listed below:

  • Personal loan for payday loan debt consolidation
  • Credit card
  • Sell assets
  • Reduce expenses
  • Pick up a side gig or extra hours
  • Borrow from friends or family
  • Credit counseling and a debt management plan
  • File a complaint
  • Debt settlement
  • Bankruptcy

The one thing you don’t want to do is ignore it. Ignoring payday loan debt leads to endless bank account overdraft fees, debt collection calls and possibly ending up in court. At least one of the options below can help you, though.

1. Personal loan for debt consolidation

If you have a stable income and your credit report doesn’t show recent bad credit, you may be able to get a long-term debt consolidation loan from a commercial or P2P lender.

Some personal loan providers specialize in people with lower credit scores. And you may be able to raise your score by paying your loan as agreed, if the lender reports to credit bureaus.

Many personal loan providers can get your money in a few days (or even hours in some cases).

While interest rates for less-qualified applicants can approach 36%, that is much, much less than payday lenders charge. And you’ll be able to pay it back with monthly payments over a longer period of time, which may remove a lot of pressure.

You may be able to get approved for a personal loan if you can offer collateral (like a car) or get a co-signer, even if your credit score is low.

One personal loan to avoid is the “personal loan with no credit check.” In fact, that loan is – you guessed it – a payday loan.

2. Credit card

In a financial emergency, you might not have time to apply for a credit card. But now you do, and you should. Even a credit card with the highest interest rate is cheap compared to the interest rates charged by payday lenders. If your credit is damaged or your income insufficient to qualify, you may need a cosigner.

What is a Balance Transfer Credit Card and How Does It Work?

3. Sell assets

You might be able to eliminate or at least reduce your payday loan balances by selling items you have that you don’t absolutely need.

Yes, eBay, letgo and other outlets can help you exchange electronics, art, furniture, clothing, tools, sports equipment and more for cash. If you are in such dire straights that you are rolling over payday loans, this is not the time to be too attached to your things.

4. Reduce expenses

One way to get out of payday loans is to free up other cash so that you can pay them off. You may need to switch to a basic phone and plan. Turn off the cable or satellite TV. Use the library Internet for a month or two.

Challenge yourself to buy grocery staples and avoid eating out (even fast food) for a month. Carpool or at least combine errands to save on gas. Drive less and consider raising your insurance deductible to save on premiums.

Ask your family for ideas on how to solve the problem and have everyone commit to the plan. Make sure they understand the importance and that better times will result.

5. Pick up a side gig or work extra hours

If you can take on overtime or pick up some part-time work, make a plan. Determine how much you could bring in and how long it will take to get out from under your payday debt.

Working more may offer additional benefits because there is less time to spend and less boredom to worry about.

Personal Loan Payment Calculator

6. Borrow from friends or family

You may have to swallow your pride and ask for help.

Be as businesslike as possible and state how much you need to borrow and how you’ll repay it (online transfers set up for every payday or monthly work well). Put it in writing and have everyone sign. This creates an enforceable debt, which might make your relative feel safer when lending to you.

Alternatively, you can ask family to add you as an authorized user to one of their credit cards. Use it for consolidating payday loan balances and pay off your charges over time.

7. Credit counseling and a debt management plan (DMP)

A non-profit credit counseling service can help negotiate with your creditors. A counselor would ask on your behalf for payday lenders to reduce your fees or lengthen your repayment time. While payday lenders are by nature predatory, they also know that it’s better to get some of what’s owed than nothing if you file bankruptcy.

Credit counselors may be able to tell you if your payday loans are legal or if your lender has violated local laws. In that case, you can file a complaint and make your loan disappear.

With a debt management program, you pay a monthly amount into the plan and the credit counselor distributes it among your creditors. You can use a DMP for credit card debt and other unsecured loans also.

8. File a complaint

Just because a payday lender is operating in your state doesn’t mean it’s operating lawfully. According to American Consumer Credit Counseling, you may have grounds for a complaint against your lender.

  • Truth-in-Lending violations may occur when lenders do not disclose the true cost of credit (the annual percentage rate, or APR). They may try to get around it by claiming that your advance was not a loan. They may also threaten to prosecute you for writing bad checks, which they cannot legally do.
  • You may be able to charge violations of state payday lending laws. These can limit interest rates, specify minimum loan terms, number of rollovers and maximum amounts. They may also require licensing.
  • Usury laws in many states cap the interest rates for small loans. In states with usury laws, payday lenders may ignore regulations, try to get around them by claiming they are not lending but providing a check-cashing service, or committing other violations.

It’s not easy to know what your state’s laws are concerning payday lenders. But you can file a complaint online with the CFPB if you believe that you were misled.

What Happens if You Don’t Pay Back an Unsecured Personal Loan?

9. Debt settlement

Debt settlement has a seedy reputation with personal finance professionals because it encourages clients to avoid their obligations, offers no guarantee of results, and can ruin your credit. It can also be expensive, and your forgiven amounts are taxable. Also, debt settlement companies tend to focus on larger balances than those you are likely to run up with a payday lender.

However, there is nothing to say you can’t negotiate a settlement or payment plan with your lender.

If you have rolled over a balance more than twice, there is a good chance that the lender has already doubled its money and may be willing to discharge your debt for a lower amount than the loan balance, or extend your repayment time. Make sure that you get an agreement in writing before you part with your money.

10. Bankruptcy

If you are in bad financial shape – bad enough to be rolling over payday loans – you are likely to qualify for a Chapter 7 (clean start) bankruptcy. Those who qualify can get their unsecured debts like credit card balances, personal loans and payday loans discharged.

Some assets like a modest car, work tools, retirement savings and some home equity (called “exempt” property) can be shielded in many states, while other valuable assets, if you have them, will be sold by the court to pay creditors.

If you can’t afford to file (there are filing fees), stop paying your unsecured debts like your payday lender and put money aside to file yourself or pay an attorney to file for you. Some bankruptcy attorneys let their clients pay them over time if they have reliable income.

Bankruptcy creates a public record and credit bureaus will include it on your credit report and in your credit score. Amounts discharged in bankruptcy are not considered taxable income by the IRS.

New Habits: How to Avoid Payday Loans in the Future

The reason people most often turn to payday loans is that they have no emergency savings. And they may not believe that they qualify for better loans. So to avoid returning to the trap, hang on to your new money-saving habits.

  • Put aside even $20 per week. Then in ten weeks you’ll have $400. (The average payday loan is $375.)
  • If you need to build or rebuild a credit history, you can use that savings to qualify for a secured credit card. Find one with low fees that reports your payment history to credit bureaus. Eventually, you’ll qualify for a line of credit that you can use in an emergency.
  • Verify your employer’s policy on paycheck advances. It might even be free.
  • Use an online banking app like Dave, Marcus, Chime or Simple. These offer features like no or low fees, overdraft protection, budgeting tools, debit cards, even cash back on some purchases. They can help you establish your emergency savings faster and avoid wasteful fees and unwise spending. If you use check-cashing services and switch to a no-fee app or bank, you’d typically save about $400 a year. And many of these don’t use ChexSystems to qualify depositors.
  • Pay credit card balances every month. Use them for convenience and to establish credit, not fund a lifestyle you can’t afford. Keep one card empty for emergencies.

If you owe large or multiple payday loan balances, your situation is dire. But you do have options and, over time, you can turn your financial situation around to achieve more security.

Compare personal loans for payday loan consolidation

About Author
Gina Pogol
Gina Freeman writes about personal finance and has been featured on MoneyRates, The Mortgage Reports, MSNMoney, Fox Business, Forbes, The Motley Fool, and other fine websites. Her background includes tax accounting with Deloitte, over 20 years in mortgage sales and underwriting, systems consulting for Experian, and several years in bankruptcy law. Gina enjoys helping consumers make confident and intelligent financial decisions.
Our reviews are unbiased and thorough, focusing on consumer needs. For details, see our Editorial Policy & Methodology.