How do you know that you are working with a legitimate payday debt consolidation company?

Should you try to reduce your balance through a debt relief program, or attempt to pay it off with lower monthly payments from a long-term installment loan?

People with bad credit qualify for a debt relief program more readily. They find it very difficult to gain approval for a new borrowing account that combines multiple payday loans from different companies into one monthly payment.

Choosing the right payday cash advance consolidation service is often more important than reviewing the companies behind them. Many legitimate companies can seem like scams if you begin with unrealistic expectations, or choose an option that does not fit your needs and qualifications.

Review the pros, cons, and eligibility criteria of payday debt assistance and loan consolidation.

Payday Debt Relief Programs and Companies

A debt relief program is often the most direct form of financial assistance with payday loan obligations. A settlement company specializes in negotiating with lenders on behalf of consumers. A settlement occurs when the lender agrees to accept less than full payment when a borrower is experiencing a financial crisis.

You begin by making regular payments to the settlement company in order to build a modest nest egg held in an escrow account. Money held in the escrow account that you control improves your bargaining position.

Benefits of Debt Settlement

Do you qualify for debt relief? The primary benefit of a debt relief program is that you can eliminate your obligations for a fraction of what you already owe on the accounts. The lender agrees to accept partial payment, stops the collections calls and dunning notices, and stops renewing the payday loans and charging rollover fees every pay period.

Paying off only a partial amount is clearly superior to paying off the full balance. The company may also assist you in developing a debt management plan, which helps you manage your finances more responsibly in the future.

Drawbacks of Debt Settlement

The first drawback to debt settlement for payday loans is the time it may take to accumulate sufficient funds in your escrow account. You will accumulate additional rollover fees in the interim – as they often renew weekly or biweekly. Rollover fees add up very quickly.

A second drawback is that the lender will report any forgiven debt as income to the IRS. You may need to make an additional tax payment. However, distressed borrowers often have low incomes and fall into very low tax brackets.

The third drawback is that settled debt may appear as a negative mark on your consumer report. This could hurt your credit score. However, since the forgiven balances already appear as late payments, the impact to your score is negligible. The new status will disappear from your consumer report at the same time – 7 years after the date of first delinquency.

Bad Credit Qualifications

People with bad credit history and negative marks on their consumer report find it easier to qualify for a settlement program in order to reduce their payday loan debt. There is no minimum credit score requirement.

Free debt consolidation quote. These are the qualifying criteria, which many people with bad credit easily satisfy.

  1. You owe more than $7,500 in unsecured obligations, which include personal loans, credit cards, payday cash advances, and others.
  2. You are currently behind on payments by three months or worse.
  3. You are experiencing a financial hardship due a loss of income and/or unexpected bills

Make certain the settlement company that you choose has a positive rating from the Better Business Bureau – even though they only track complaint rates. Most reliable online companies will proudly display the BBB logo on their website.

The federal government publishes a list of approved debt management, credit counseling, and debt education companies. Non-profit status means the organization enjoys a tax exemption. It does not mean they are trustworthy – as many liberals would have you believe.

Combining Payday Loans into Single Monthly Payments

Debt consolidation loans allow you to combine multiple payday loans from different companies into a single monthly payment. New borrowing does not eliminate or reduce the principal balance on your obligations. You do not get out of debt when you do it yourself using this method.

You can choose to combine your deferred deposit transactions into a long-term installment loan, or by transferring the principal to a revolving account. Each approach has unique pros and cons.

Installment Loan Consolidations

Long-term installment loans are one way to combine payday loans from several different companies into one monthly payment. You repay an installment contract over time with a set number of periodic payments that remain constant. They come with many familiar names, with unique repayment timeframes – the key point for this exercise.

Installment Type Repayment Timeframe
Payday cash advance Weeks
Personal loan Months
Automotive financing Years
Mortgage Decades

Installment Loans Benefits

Consolidating weekly payday installment loans into longer-term contracts have two primary benefits: lower monthly payments, and possible interest savings.

Lower Monthly Payments

Payday installment loans have a balloon payment comes due in full when your employer cuts payroll. Typically, that is either weekly, bi-weekly, or bi-monthly. You owe the full principal amount, which makes the payment relatively large.

Long-term contracts have lower monthly payments because they allow more time to repay the principal. You may have 6, 12, 24, 36 or more months to repay what you owe, instead of weeks. This makes payments more affordable and helps you stay current.

Lower Interest Rates

Weekly payday installment loans have rollover fees, which the lender imposes when you cannot repay the entire balance in full. While these rollover fees seem relatively small, they translate into a very high annual percentage interest rate.

For example, the average renewal fee on a deferred deposit transaction is 15%. The number grows rapidly when you annualize the percentage by assuming the borrower renews 52 (weekly) or 26 (bi-weekly) times over the course of one year.

Follow this example of a $500 amount with a $75 rollover fee (15%) to illustrate the point.

Annual Cost APR
26 Bi-weekly $1,950 490%
52 Weekly $3,800 880%

Long-term installment loans have a single upfront origination fee. You pay the upfront origination fee only once rather than every pay cycle. While they also charge periodic interest, the rate tops out at 35% for the least qualified approved borrowers. This can save a tremendous amount of money for borrowers needing more time.

Installment Loan Drawbacks

Consolidating weekly payday installment loans into long-term contract have one primary drawback. This does not reduce the principal balance. You are not getting out of debt. This only restructures the terms of your obligation.

This can easily lead to more problems if you take your foot off the gas and then encounter another cash shortage. Long-term installment loans take the repayment pressure off. Without the constant burden of incurring yet another rollover fee, you can easily wind up with worse problems than before.

Nothing stops you from taking out another deferred deposit transaction when the next cash emergency crops up. If that happens, you will find yourself owing more money than before. Now you will have both short-term and long-term installment payments to make – which is far worse. Do not fall into this trap.

Bad Credit History

Borrowers with bad credit history and score rarely qualify to consolidate payday cash advances into a new long-term installment loan. Lenders will always pull a copy of your consumer report as part of the underwriting process. They frequently deny applicants with low credit scores and negative marks on their file.

Every applicant must demonstrate sufficient income to handle the projected monthly payments. The lender will calculate a debt-to-income ratio to determine eligibility. Anyone unemployed or between jobs will fail this test. People with bad credit must perform extremely well on this measurement to balance out their application.

Installment Loan Types

You can choose between several types of long-term installment loans to combine multiple payday obligations into a single monthly payment. Each type has unique features. Remember, the longer the repayment term is, the lower the amount you owe each period, but the higher you total interest costs will be.

  • Unsecured personal installment loans do not require collateral. You do not have to worry about the lender taking your car or home if you fall behind.
  • Automotive financing is a secured installment loan that requires that you pledge your vehicle as collateral. Refinancing is an option if you owe less than the wholesale value of your car.
  • Mortgages are a second form of secured installment loans that require equity in your home. You can refinance your mortgage or take out a second mortgage.
    • Closing costs are often very high
    • Lowest interest rates when secured by home equity
    • Repayment terms from 1 to 3 decades

Revolving Account Consolidations

Revolving accounts are another way to combine several payday loans into one monthly payment. A revolving account allows the customer to defer payment on part of the outstanding balance every month. A credit card and a home equity line of credit are the two most common revolving account types.

Credit Cards

Credit card revolving balance transfer checks are another avenue to combine multiple payday loans into a single monthly payment. The person must have sufficient open to buy to allow this possibility. The open to buy is the difference between the account limit, and the existing balance.

Use the balance transfer check to pay off all of your payday cash advances to avoid further rollover fees. Although revolving a credit card balance allows interest charges to accumulate very quickly, the projected APR is actually much lower than the alternative.

The downside to this approach is that it can take years to pay down the revolving credit card balance. It may cost you more money in the end.

Consumers with bad credit history may find it difficult to qualify for a new credit card account.

Home Equity Line of Credit

A home equity line of credit (HELOC) is the final option to consolidate multiple payday loans into one lower monthly payment. With an HELOC you open a revolving account secured by the equity in your home.

  1. Withdraw funds from your HELOC account to pay off your deferred deposit balances during the draw period – which can last for up to 10 years.
  2. Repay the amount your borrow with interest during extended repayment periods

Borrowers with bad credit history frequently find it difficult to qualify for an HELOC.

  1. You must be a homeowner with sufficient equity.
  2. You must demonstrate sufficient income.
  3. Your rating must exceed specific thresholds

Further Reading