Payday loans are generally short-term loans for a small amount, typically around $500, in which the payment is due your next payday. They are marketed as a helpful bridge between paychecks. However, payday loans come with fees that translate to ultra-high annual percentage rates, or APRs, making them challenging to get rid of.

However, payday loan debt relief is possible. A payday loan consolidation allows you to take out a new loan, usually with a lower interest rate and a set monthly payment that you can pay off over time.

Why debt consolidation for payday loans can help

If you’ve taken out a payday loan that charges exorbitant fees, the struggle of making payments can feel overwhelming. This is an especially difficult type of debt to pay off because borrowers can be trapped in a cycle of debt. About 12 million people take out payday loans every year, and more than 80 percent of these loans are rolled over into a new loan because the borrower couldn’t pay off the bill on time.

However, a debt consolidation loan can help as it’s easier to manage and comes with significantly lower borrowing costs. There is an assortment of debt consolidation for borrowers with bad credit with APRs capped at 35.99 percent. A typical two-week payday loan with a $15-per-$100 borrowed fee, for example, equals an APR of almost 400 percent, according to the Consumer Financial Protection Bureau.

The drastic increase in interest rates means you could save a fortune by rolling what you owe into a new loan with a far lower interest rate.

How payday loan debt consolidation works

With a debt consolidation loan, you’ll take out a loan with a lower interest rate and use the funds to pay off your high-interest debts. Then you’ll repay the debt consolidation loan over time. The monthly payments are more manageable compared with payday loans. That’s because the interest rate on a debt consolidation loan should be much lower, and you pay off the loan over a longer period, usually 12 to 84 months, rather than within two weeks.

First, you need to shop around for a lender that offers debt consolidation loans. Some online lenders will run a prequalification check, which won’t hurt your credit. They’ll review your credit reports and estimate the interest rate, loan term and monthly payment you may qualify for. Before applying, make sure you can afford that payment every month.

Unlike a payday loan, debt consolidation loan payments are reported to the credit bureaus. That means making on-time payments can help you improve your credit over time.

Benefits of a payday loan consolidation

If you need payday loan help, a consolidation loan can help you get your finances back on track. Debt consolidation loans typically offer:

  • Lower fees: Some personal loans come with an origination fee, usually around 1 percent to 5 percent of the loan amount, but you may be able to find a loan without an upfront charge.
  • Flexible repayment terms: Personal loans offer repayment terms that usually range from 12 to 84 months. Payday loans usually must be repaid on your next payday, or typically within two to four weeks.
  • Predictable monthly payments: With a personal loan, you’ll make one monthly payment until you repay the loan. If the interest rate is fixed, your payment typically remains the same throughout the life of the loan.
  • Required credit check: A debt consolidation lender wants to make sure you can afford the monthly payments before you sign for the loan. That might seem like a downside, but it means you’re less at risk of getting trapped in a debt cycle. They’ll usually verify your income source, check your credit reports or ask about cash reserves. They may be willing to work with you even if you have a lower credit score. On the other hand, payday lenders generally don’t check to make sure you can handle the loan.
  • No rollovers: Once you’ve paid back all of the money, you’re done. Your account is closed and the loan is marked as paid off. You’ll have to apply for a new loan if you need more money.

Drawbacks of a payday loan consolidation

Payday loan relief probably sounds great. However, you should consider these points before applying for a new personal loan:

  • You may still default on the loan payments. Although you plan to make every payment on time, a job loss or another hurdle might throw off your finances again. Any missed or late payments could damage your credit score, and the loan consolidation lender may send your account to collections. Try to plan for financial emergencies by stashing away as much savings as you can in an emergency fund.
  • You may not qualify for a low interest rate. Depending on your creditworthiness, personal loan interest rates typically range from about 4 to 36 percent. Many online lenders are willing to work with people with low credit scores, though your interest rate may be higher. They’re still lower, however, than the payday loan costs, which can have around 400 percent or higher APRs. You can also look into payday alternative loans if you’re a credit union member. These are small, short-term loans with affordable interest rates.

Alternatives to payday loan debt consolidation

Consider these alternatives if payday loan debt consolidation doesn’t sound right for your situation.

Extend the repayment period

In some states, payday loan lenders are required to extend your repayment period past your next paycheck. This can help because your payments will be smaller, and you’ll have more time to get the money together.

Ask your payday lender if this is an option, if it prevents adverse credit reporting and whether you’ll pay a fee.

Enter a debt management plan

Under a debt management plan, you work with a credit counselor to negotiate with your creditors for better loan terms. Once you agree on a monthly payment, you’ll send funds to the credit organization monthly. In turn, the organization will pay your creditors.

Working with a reputable credit counseling agency is important, so research your options before signing up for a plan. Enrolling in a DMP won’t directly affect your credit rating, but you’ll likely have to close any account included in the plan. This could significantly increase your credit utilization and lower your credit score, making a debt consolidation loan more viable.

Plus, DMPs come with monthly fees collected by the credit counseling agency, and you may find that a debt consolidation loan is a far cheaper option to get rid of those pesky debt balances.

File Chapter 7 bankruptcy

Chapter 7 bankruptcy is a legal process that can help certain people discharge some or all of their debt. You’ll have to follow a strict process, and some of your assets could be sold to pay off some of your debt.

This move is usually a last resort because it has major consequences. Your credit score will be damaged, and it may be tough to qualify for credit for a few years after the bankruptcy discharge.

If possible, try to get approved for a debt consolidation loan, even if it comes with a higher interest, to minimize bankruptcy’s lasting impact on your credit and overall financial health. Also, consult with an attorney before choosing this option.

Bottom line

If you’re struggling to eliminate payday loan balances, a debt consolidation loan can help. They come with much lower interest rates, and you could get approved even with less-than-perfect credit.

If payday loan debt consolidation doesn’t seem viable, consider alternatives, like rollovers, DMPs and Chapter 7 bankruptcy to find relief. Just be sure to run the numbers to ensure whichever form of relief you pursue makes financial sense.