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Which payday loan consolidation program works better and which company should you use?
Consolidation is actually two distinct methods sharing similar names.
Relief programs help to eliminate the amount owed by negotiating a settlement with creditors. Personal installment loans assist by extending repayment terms and lowering the periodic borrowing costs.
Consumers should choose the consolidation method that best fits their financial situation.
- Debt relief fits consumers with large amounts, sufficient income, and bad credit
- Personal loans fit borrowers with small amounts, good income, and/or credit score
Payday Debt Consolidation Personal Loans
A payday debt consolidation personal loan offers monthly installments and lowers the periodic borrowing costs. The lower costs and more affordable payments can help borrowers end the cycle of spiraling cash advance rollover charges.
|Max Interest Rate||36%||400%|
|Repayment Term||6 – 24 Months||2 Weeks|
The lender you choose to work with is far less important than your qualifications and the choices you make after the underwriter approves the application and pays off your existing obligations. The borrower typically determines whether this method is a success or failure – not the bank.
Installment Loan Success
Request a debt consolidation loan online here if you fit the success factors. A personal loan to consolidate payday loans with monthly installments works well for borrowers that lenders will approve. In general, this means consumers taking out smaller amounts, with good incomes, and/or credit scores.
Online lenders are more likely to approve personal loans for small amounts. Small amounts have more affordable monthly installments. This makes it easier for bankers to say yes and for consumers to pay off cash advances with the proceeds.
Consumers seeking to consolidate payday loans often owe small amounts. As noted above, state laws limit the amounts people can borrow via cash advance, and the number of times they can rollover an unpaid balance.
Folks who fail the $10,000 requirement for a relief program can still qualify for a personal loan. The lower monthly payments and better borrowing costs do help.
Online lenders are more likely to approve a personal consolidation loan when the borrower can demonstrate solid earnings and provide employment verification. They want to see that you have sufficient income to make each monthly installment on time.
The lender will calculate a debt-to-income (DTI) ratio before approving a prospective borrower. The DTI is a measure of affordability. It is a simple calculation.
Monthly debt service/monthly income
People with bad credit scores can sometimes qualify based on income only. Those with a very low DTI can win approvals without a credit check. Employment verification is critical in this instance.
Personal loans are the best alternative to consolidate payday loans when borrowers have good credit scores. Individuals with good credit are more likely to win an approval at favorable interest rates. Most importantly, they can improve their ratings over time rather than deliberately hurt them.
- Payday businesses do not report payment history to the consumer bureaus. Personal loan lenders do report. Boost your ratings over time with on-time payment of installment contracts and extra account diversity.
- This approach encourages on-time payment rather than default. The relief programs noted above require that you stop making payments – which lead the lenders to refer accounts to collection agencies – who then report negative information to the agencies.
Installment Loan Failure
Unsecured loans with monthly installments do not work well to consolidate payday debt if the lender rejects the application or the borrower takes out additional cash advances after an approval. Some people just fall through the cracks while others encounter future emergencies.
For example, unemployed workers often find it difficult to qualify for either a personal loan or a debt relief program. Both options require sustainable future income. On the bright side, the payday outfit cannot garnish wages when you have no job!
On the other hand, people who retire payday balances with the proceeds of an approved personal loan often experience other emergencies. Many are one surprise car repair or doctor bill away from having to take out another cash advance. This scary scenario is far too typical.
Payday Debt Relief Programs
Payday debt relief programs work by consolidating your resources into a single escrow account over time. Once the escrow account balance reaches a specified amount, the online company begins to negotiate a settlement with your creditors.
If successful, your creditors agree to eliminate the obligation in exchange for partial payment.
However, the success factors depend more on your individual financial situation and dedication to the process than the company you choose. Reviewing and selecting a legitimate accredited company or choosing a top-rated non-profit organization is a small part of the equation.
Qualifying for Relief
Do you qualify for debt relief? Payday loan relief companies operate by consolidating funds into an escrow account and then using the balance to make settlement offers to creditors.
The people who successfully eliminate payday debt via settlement share three traits.
- Owe more than $10,000 in unsecured obligations
- Have a good job, steady income, and can commit to the process
- Already have a bad credit score
More Than $10,000
Payday debt relief companies offer consolidation services to assist consumers owing more than $10,000 in unsecured obligations. The term unsecured means that you did not pledge collateral such as a house, boat, car, or jewelry. Eligible obligations include the following.
- Credit card balances
- Unpaid medical bills
- Cash advances
The average payday loan has an opening amount $300 with a 15% finance charge and two-week term. Many states limit the amount you can borrow and the number of times you can roll over the balance. Since cash advances do not charge interest – there is a legal barrier on the size of these obligations.
In other words, most consumers (even those taking out multiple cash advances and rolling them over multiple times) may not reach the $10,000 minimum requirement on payday loans alone. Having too many may not be enough!
Payday debt relief programs work best for consumers with a good job, sufficient ongoing income, and a commitment to the process. They need to consolidate funds into an escrow account with at least 1/3 of the outstanding obligations before the company can begin to negotiate a settlement with creditors.
It takes time to accumulate at least $3,333 into the escrow account. Consumers can reach this goal with dedication and persistence. They combine two primary funding sources.
- Devote money from each paycheck to fund escrow
- Stop paying collection accounts and divert the money
In addition, by shortening the escrow account accumulation phase you minimize the number of times the payday business may debit your checking account and ring up overdraft fees. Many relief companies recommend closing the checking account to prevent this from happening.
People with bad credit scores find that the relief programs work best to assist with consolidated debt from multiple payday loans. This is true for several reasons.
- There is no minimum credit score requirement because you are not borrowing money. The company does not pull a copy of your consumer report and does not care about your rating.
- You will deliberately stop paying all unsecured creditors as you combine all payments into the escrow account.
- Creditors are more likely to settle with consumers delinquent on payments. They have no reason to accept pennies on the dollar from a person paying on time.
- Additional negative marks (charge-offs and collection accounts) may appear on your consumer report. However, this matters little to folks who start the process with very poor ratings.
Legitimate payday debt relief companies will comply with applicable laws, make full disclosure on fees, and will not make unrealistic promises.
Finding a legitimate consolidation company does not help you eliminate payday loans. Your behavior and commitment to the process are much more important than the provider you choose. Be honest with yourself before reading a long list of reviews.
Reputable companies will follow the Telemarketing Sales Rule (TSR) guidance published by the Federal Trade Commission (FTC). Debt settlement, negotiation, and credit counseling outfits must follow three basic tenets. Non-profit organizations are exempt.
- Fees are collectible only after they renegotiate or settle the balance
- Disclosing specific information is required
- Cost of services and other important terms
- Length of time it will take to yield results
- Amount of money you must save before settlement offers begin
- The consequences for missed payments to existing creditors
- Customer rights regarding funds held in dedicated (escrow) accounts
- Misrepresenting services is illegal
Better Business Bureau (BBB) accredited payday loan relief companies must meet standards for responding to consumer complaints and pay an annual fee based on the number of employees.
BBB accreditation does not assure that the company will help you get out of debt – or that it is the best solution to your problem. Your behavior is far more important than how the consolidation firm handles complaints and whether it can afford to pay the annual membership fee and display a badge on its website.
The BBB published an article about settlement programs acknowledges that reputable accredited companies have limits on what they can achieve for customers. They are not miracle workers.