Payday loans have been known to help customers in a tight bind. But ultimately, they can be very expensive in the long run. Discover the best way to pay off debt by consolidating loans.
Payday loans are a type of short-term loan. They are often a relatively small amount, offered at a high interest rate and paid off over a short period of time, usually after your next wage comes in.
Payday loans are typically used if an individual needs quick access to money before they are next paid - to cover an unexpected expense such as car repair. However, their high interest rate makes them more expensive than regular loans. Problems may also arise when lenders ask to be repaid in full within a shorter period.
If the borrower cannot meet the repayments or needs to extend the lending period, the outstanding balance tends to increase sharply due to the high interest rate at which a payday loan is advertised.
There are several ways in which a borrower can take control of their finances after using a payday loan, such as payday loan debt consolidation. Often offered at a smaller interest rate than payday loans, debt consolidation loans can be beneficial in transferring a borrower’s debt into one simple repayment plan.
Expense of payday loans
A recent cap implemented by the Financial Conduct Authority (FCA) means that charges on top of payday loans cannot exceed 0.8% of the total payment per day. This means for every £100 you borrow, you won’t pay more than 80p a day for fees and charges. However, over the course of the year, payday loans cost over 50 times more in APR than the average credit card, so missing or extending your repayment plan can prove costly in the long run.
If you have taken out more than one payday loan, or have been paying one off for an extended amount of time, debt consolidation and payday loan debt advice can help you organise your finances into one manageable payment.
What is debt consolidation?
A payday loan debt consolidation is used as a way for a borrower to combine all their debts into one loan repayment plan. By merging multiple debts into one loan, you can lower your outgoings and potentially improve your financial situation.
If you currently have multiple high-interest loans, you may find this is the best way to reduce debt.
To do this, a borrower would apply for a loan amount that’s enough to pay off their current debts, reshaping their debt into a more manageable repayment plan to a single lender. Choosing this method of consolidation also means a single interest rate is charged, which can save on interest being charged above the balance. By paying off this single loan in full and on time, you could also improve your credit score.
However, the Money Advice Service recommends you only choose this method if the interest is the same or less than what you were paying before, and you can afford to keep up with the repayments. Therefore, it’s important to seek payday loan debt advice and compare lenders to find one that works best with your current situation.
Can I consolidate payday loans?
Yes - like other forms of debt and credit, it’s possible to consolidate payday loans into one repayment. The purpose of consolidating payday loans is to allow the borrower to pay off all existing debts with one loan, which can be managed more easily.
While payday loans are intended as short-term borrowing, there’s a variety of loan products on the market designed for longer-term use to help you manage your finances. Taking out payday loans on a regular basis could have a negative effect on your credit score, as lenders may view your borrowing as a risk. However, being approved for a new loan to help pay your debts can help you better manage your finances.
What are the pros and cons of debt consolidation?
As with any form of borrowing, there are both pros and cons to debt consolidation. Whether debt consolidation is the best choice for you will depend on your personal circumstances. It can be a strategic move to help you manage your finances, but there may be drawbacks. So, consider carefully whether this is the right debt management solution for you.
Pros of debt consolidation
Easier to manage debts
When all your debts are consolidated into a single loan, you only have to worry about one repayment each month. This can make it easier to keep track of your finances and stay on top of your debt. With only one repayment to manage, you will be less likely to forget to make a payment.
Potential to pay off debt faster
You may find that some personal loan options allow you to pay off your overall debt faster, particularly if you can get a lower rate of interest on your debt consolidation loan. It may depend on your available loan repayment strategies and credit rating, as this will affect the interest rates you can secure.
Opportunity to build credit if you pay on time
If you can make each repayment on your new loan on time, you could gradually start to improve your credit rating. This means you will have more options available for credit over time.
Can save money with a lower interest rate
You may find that with a single debt consolidation loan, you can save money. Your interest rate may be lower, especially if your current borrowing is designed to be short-term and high-interest, and your new loan is repaid over a longer period.
Cons of debt consolidation
You might not receive a better offer
There are no guarantees that the available debt management solutions will be accessible to you, as this depends on your credit rating and personal circumstances. Do your homework and see if there are refinancing options available to you before deciding to consolidate.
There can be upfront costs
New personal loan options may come with upfront costs. If you can’t afford to pay these, debt consolidation may not be an option. These upfront costs could also result in your overall repayments being higher than they already are.
Missed payments can have big consequences
While making loan repayments on time can help improve your credit rating, missing payments can have significant consequences. If you cannot afford to make the new monthly repayments or if you miss one or more, you may find your credit rating decreases rather than improves. This could affect your future ability to take out credit.
Doesn’t directly improve your relationship with money
Consolidating all your debts into a single repayment plan does not in itself improve your relationship with money. Whatever route you take, you will still need to think about ways to better manage your finances both now and in the future.
Do consolidation loans hurt your credit score?
A payday consolidation loan can hurt your credit score if you are unable to meet the payment requirements. In most cases, if a repayment is more than 30 days late, it will be marked on your credit history, potentially affecting your future financial choices.
Consolidating your debt may have an immediate negative impact on your credit rating. However, this effect should only be temporary, provided you continue to meet the new repayment plan every month.
If you do meet the payment requirements, a payday consolidation loan could make for a healthier credit score. Making regular payments on time shows you as a reliable borrower, especially if you can completely eliminate your outstanding balance.
Is consolidating loans a good idea?
This depends on your financial situation, as well as the debt consolidation type you are considering. Before you consolidate a loan, it’s important to weigh up the positives against the negatives. Payday loan consolidation can help short-term by reducing how much you pay out monthly, but this means you will pay more long-term due to the increased interest.
Advice on debt consolidation
When considering taking out a debt consolidation loan, seeking out expert advice can help guide you to improve your money management.
There’s an abundance of free, helpful debt advice services online including Step Change and PayPlan. These services can assess your unique situation to offer support and payday loan advice on how to take control of your finances and can help you with things like making a budget.
You can also find further guidance on a range of loan types and frequently asked questions about money matters by visiting our Know How page
Speak to Norton Finance about debt consolidation loans.
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