How does debt consolidation work?

Payday Loan Consolidation Options to End the Debt Cycle

By Anna Wolf

Payday loans can help with an emergency today, but often create a heavy financial burden for tomorrow. Because you have to repay the total amount borrowed plus fees in a matter of weeks, many people struggle to pay off payday loans. In fact, the Consumer Financial Protection Bureau (CFPB) says the majority of people who use payday loans end up renewing the loan so many times that they pay more in fees than the amount they originally borrowed.

If you’re stuck in a painful debt cycle, there is a way out. Payday loan relief programs and payday loan debt consolidation are common ways to manage outstanding payday loans. We’ll describe how each method works and how it could help you break free of payday loans.

Debt consolidation loan

An installment loan allows you to consolidate payday loans and other types of debt like credit cards and medical bills. You can pay off multiple payday loans with one single installment loan, thereby consolidating the debt.

  • How does it work? After you’re approved for the loan, the lender will either pay off your existing debts for you or disburse cash so that you can pay off debts yourself. You’ll now make one fixed monthly or biweekly payment for just the installment loan.  
  • What are the eligibility requirements? Most lenders will examine your credit score and other financial info to determine if you meet their standards and establish your interest rate. A better credit history generally translates to a lower annual percentage rate (APR).
  • How much debt can I pay off? Installment loans range from a few hundred to several thousand dollars.
  • What are the costs? You’ll pay interest according to a fixed rate. Some lenders may also charge origination, processing or prepayment fees (when you pay more than the minimum amount).
  • How quickly can I be debt-free? Once you secure an installment loan, your payday loans will be paid off right away—in full. You’ll now work on paying off the installment loan, which has a set term, or final due date. Loan terms can range from a few months to a few years.
  • What are the key benefits? An installment loan can help break the payday loan cycle. No more rolling over your payday loans every two weeks and watching the fees climb higher. Because the APR for an installment loan is typically lower than a payday loan, you could save money by paying less interest. And if you’ve been making payments on multiple payday loans, consolidating them into one installment loan can make your monthly payments simpler and easier to keep track of.
  • How is my credit score impacted? Any time you apply for a new loan, your credit score can take a drop. However, if you make your payments on time and in full, an installment loan can help improve your credit score over time (if the lender reports to credit bureaus).  Also, with a RISE installment loan you get access to free credit monitoring and financial education to help you create better money habits that could also boost your score.

Debt relief programs are another way break the payday debt cycle. Payday loan relief programs come in two different forms--debt management programs and debt settlement programs:

Debt management program (DMP)

These plans are offered by credit counseling agencies as part of a program that includes personal finance education.

  • How does it work? Instead of giving you a new loan, the agency negotiates lower payments with your creditors on your behalf. The agency won’t negotiate to reduce your original debt—but they will negotiate to reduce the interest rate and late fees. DMPs generally take one consolidated monthly payment from you and then distribute it to your various creditors. As a condition for receiving the lower rate, most DMPs require you to stop taking on additional debt and close your credit cards.
  • What are the eligibility requirements? Most types of debt, including credit cards and payday loans, are eligible. Student loans and mortgages are not typically eligible.
  • How much debt can I pay off? As much as you want. There is generally no limit to the amount of debt that can be enrolled in a DMP. Agencies often encourage borrowers to place all their accounts into the program so debt can be managed holistically.
  • What are the costs? Agencies typically charge an enrollment fee and a monthly fee, usually around $25.
  • How quickly can I be debt-free? DMPs usually span three to five years.
  • What are the key benefits? The agencies aim to help you manage your debt by negotiating lower interest rates and setting up consolidated, predictable monthly payments. You may also benefit from removal of temptation to continue taking on more debt, and from learning how to better manage your future debt.
  • How is my credit score impacted? Enrolling in a DMP will trigger a “DMP” notation on your credit report. But this alone isn’t cause for concern. According to Lynnette Khalfani-Cox, The Money Coach, “Officials from Fair Isaac Corp., the creators of the FICO credit score, have been very clear in saying that entering into a debt management program does NOT lower your credit score and the DMP notation is not counted against you at all when your FICO score is calculated.” Closing accounts, however, can negatively affect your score by impacting your debt usage ratio—but as you establish an on-time payment history with the DMP, your credit score can improve over time.

Debt settlement program

Offered by specialized firms and lawyers, debt settlement programs aim to reduce the amount you owe.

  • How does it work? Once you sign up for a debt settlement program, you’ll stop making payments on outstanding debts and instead make payments into an escrow account set up by the debt settlement program. When you have enough built up in the account, the firm contacts your creditors and offers to make a lump sum payment to wipe out the debt. The lump sum offered is less than the total amount owed. For example, if you owe $10,000 to a payday lender, the firm could offer the lender a lump sum payment of $5,000 to settle the debt. You’d pay just $5,000 and the remainder would be forgiven. There is, however, no guarantee that settlement negotiations will work.
  • What are the eligibility requirements? You’ll need to make the case that you are entirely unable to repay the full debt. This means documenting all your outstanding debts, payment history, assets and income to demonstrate grave financial hardship. If the creditor believes you could pay in full, they are unlikely to negotiate a settlement. Certain types of debt aren’t eligible for settlement, including most secured debt, like home and auto loans.
  • How much debt can I pay off? There’s no set maximum. Programs encourage borrowers to enroll all their eligible debts.
  • What are the costs? Settlement programs can be costly. You’ll typically pay a fee based on how much the settlement saves you, or a fee based on a percentage of your total debt (usually between 15% and 35%). Upfront fees are illegal. Debt settlement programs can also charge additional monthly fees, and you may also need to pay taxes on the amount of debt that is forgiven. Lastly, if you stop making payments while settlements are negotiated, late fees and penalties will continue to accrue.
  • How quickly can I be debt-free? Debt settlement cases usually take two to three years.
  • What are the key benefits? You can wipe out your debts by paying less than you owe.
  • How is my credit score impacted? “When a debt is settled, the creditor updates your credit report to show a status of ‘Settled’ or ‘Paid Settled.’ While a ‘Settled’ status is slightly better than an ‘Unpaid’ status, any payment status other than ‘Paid as Agreed’ or ‘Paid in Full’ is bad for your credit,” explains LaToya Irby at The Balance. Your score will also be hurt by missing payments while you wait to settle your debts.

Now that you know your options for payday loan consolidation, you can make a confident decision about how to tackle your runaway payday debt. And an online loan from RISE can help.

At RISE, we help you take control of your payday loan debt. With our installment loans, you can get $500 to $5,000 in your checking account as soon as tomorrow**, and you only borrow what you need, when you need it (state restrictions apply). With rates that can go down over time*, plus free access to your credit score, credit alerts and tools to develop better money habits, RISE gives you a way to finally break the payday loan cycle.

* Customers in good standing may qualify for a reduction in annual percentage rate ("APR"). Installment Loan Customers:  In order to be eligible, you must continue to meet RISE's credit criteria, and we will evaluate the stability of your personal information and identity for each new loan.  If eligibility requirements are met and you make 24 successful, on-time monthly payments (48 bi-weekly payments), the APR for your next loan will be 50% off your original loan's APR (excluding customers with starting rates of less than 75%). Additionally, if you continue to meet eligibility requirements and you make 36 successful, on-time monthly payments (72 bi-weekly payments), you will qualify for a 36% APR for your next loan.  Note that it may take two or more loans to reach 36% APR. In Mississippi, if you make 24 monthly payments (48 bi-weekly payments), the monthly handling for your next loan will be 50% off (excluding customers with starting rates of less than 75%). And, if you make 36 monthly payments (72 bi-weekly payments), you qualify for a monthly handling charge of 3% for your next loan with RISE. Note that it may take two or more loans to reach a 3% monthly handling charge.)   Line of Credit Customers: In order to be eligible, you must continue to meet RISE's credit criteria, and we will evaluate the stability of your personal information and identity.  If eligibility requirements are met and you make 24 successful, on-time monthly payments (48 bi-weekly payments), the APR on your line of credit will be reduced to 50% off your original APR. Additionally, if you continue to meet eligibility requirements and you make 36 successful, on-time monthly payments (72 bi-weekly payments), you will qualify for a 36% APR on your line of credit.

** Applications processed and approved before 6pm ET are typically funded the next business day. RISE is offered only to residents in states where permitted by law. To obtain credit, you must apply online and have a valid source of income and email address. Approval for credit and the amount for which you may be approved are subject to minimum income requirements and vary by state.

In some cases, we may not be able to verify your application information and may ask you to provide certain documents. Refer to Rates & Terms for additional details. Complete disclosures of APR, fees and payment terms are provided within your Agreement.

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