Does Consolidation Work with Payday Loans?
Payday loans must not be new to you. You may have known these loans by other names like instant loans and some popular phrases like “get cash fast” and “loan in two minutes.” Payday loans are small emergency loans repaid when your next payday is due.
The specialty of these loans is that you can get them without running a credit check, and this is why these loans are very expensive. What usually attracts people to these loans is that you do not have to tie yourself with these loans for too long.
You do not have to keep making small payments over a length of time, but the devil is in detail. For instance, if you have borrowed £500 that needs to be paid on your next payday with the interest of £15, you will likely think that it is so easy to settle all dues when you receive your paycheque, but you do not realise that the next paycheque amount will not increase by the interest you are to pay.
Your monthly expenses will more or less be the same as in the previous month when you borrowed money. That time you could not arrange £500, and now you are to ensure your budget has the room for additional expenditure amounting to £515.
Do you think its settlement is as easy as it seems? As a result, you will roll over the loan, and then this cycle continues and on, and in the end, you fall into a spiral of debt.
How does consolidation work with payday loans?
Well, payday consolidation is the same as debt consolidation. However, if you have been rolling over a loan from the same lender and you use a new loan to pay it off, it cannot be considered a consolidation loan. This method is popular when you have multiple loans.
A debt consolidation urgent loan from a direct lender is nothing but a personal loan. When you take out this loan to pay off your current payday debt, they are simply known with their name, not as consolidation.
This is because they are not clubbing several outstanding debts. A personal loan can be utilised for a lot of reasons, and consolidation or outstanding clearing debts is one of them. You will use these loans to pay off the entire debt and then make monthly payments towards it.
Since you are to pay down the debt in installments, you can easily manage the payments of your personal loan. Now the point is if it is worth taking out these loans. Look at the following table:
|You can take advantage of better interest rates. The APR of these loans is 36%, compared to the 391% APR of payday loans.||It cannot be easy to get the nod as it hangs on your current financial condition. Interest rates will be decided after weighing up the risk.|
|You will have a longer repayment period, between 6 months and three years, depending on the size of the loan, compared to the 14-day period of payday loans.||Personal loans cannot be extended, unlike payday loans. You will have to apply for a new debt if you need additional funds.|
|You can budget every month for your loan payment s you do not run out of cash on the due date.||A lender will check your credit rating before signing off on loan. You must have a good credit report to get competitive interest rates.|
Things to keep in mind
Here are some important tips to focus on at the time of consolidating payday loans or taking out a personal loan to pay off an outstanding payday loan.
- Comparison is the key
It is vital to compare personal loans from various online lenders. Interest rates vary because of different fee structures. Collect this information from the websites, and you can also contact their customer care support.
For instance, if you want to take out a loan of £5K in the UK, you will have to choose a lender that offers affordable interest rates carefully. As you are using these loans to pay off outstanding dues, you will likely end up getting money at a higher interest rate. Beforehand research can help choose a competitive deal.
- Create a repayment plan
A personal loan cannot be repaid in full at once even if you have money for doing so, and even if you do so, you will be imposed early repayment fees that can be a lot. As you are tied with debt for a period of time, you must have clarity on how you are going to repay it.
The repayment amount will be the same throughout the loan term. You should put by money as soon as you receive your paycheque, so you do not have difficulty clearing your dues. Make a budget to see how much money goes toward your monthly expenses, and then try to whittle down them so you can easily stow away money for the next repayment.
The bottom line
You can use consolidation loans when you have outstanding multiple payday loans. However, if you have just one loan that you have been rolling over, you can take out a personal loan to pay them off.
It is vital that you do not need to borrow more than the size of payday loans. Because of your bad credit history, interest rates could be higher, and then it will be difficult to manage personal loan repayments, so be careful.