Payday loans are typically short term loans that most people use to finance their emergency money needs i.e. for situations wherein you have an immediate need for money and the pay day is still a few days away. Generally, this type of loan is taken by people who do not have sufficient liquid savings at their disposal or who earn just enough to meet their normal monthly expenses (and are left with little to save).
Payday loan purpose
However, it is important to note that payday loans are meant to be taken for a very short term only… typically, you would pay back the loan as soon as you get your pay. However, a lot of people do not understand this and they just go for a payday loan in order to fund an expense that is not so important. These people then land into payday loan debt.
Need for payday loan debt consolidation
Here it is important to mention that though the payday loans are approved almost instantaneously (as compared to other loans that take several days to be sanctioned), the loan amounts are small and they attract a very high rate of interest… several times more than credit card APR. So, payday loan debt swells very quickly and hence a lot of people feel the need to go for payday loan debt consolidation. And sometimes people take more payday loans to pay their current payday loan.
Consolidate payday loan debt
If you feel that you cannot payback the entire payday loan in a month or so, you should consolidate payday loan debt. The first thing to do in this regard is to get the advice of a credit counselor who can tell you all the options that you have for debt consolidation for payday loans. Tell the counselor about your current finances, assets and the future scheduled expenses etc. The counselor will then be able to guide you on the best option to get out of payday loan debt.
It is important to mention here that you must choose the credit counseling service with care. You are not only going to share all your financial details with the credit counselor but also rely on his/her advice for payday loan debt consolidation. You can check with friends and family to see if they know a good counselor whose services they have used. The recommendations and references are the best way to go.
However, if you do not want to consult a credit counselor and handle the situation on your own, you should check for the various options you have for debt consolidation. If you have a good credit history then you can also go for an unsecured loan (a bank loan or a credit card loan) to consolidate/pay back your payday loans. However, this might not be a good option if you are looking to consolidate many loans and the aggregate loan amount is so big that you cannot pay it over a short period of time. Moreover, you might not be able to get an unsecured loan in such a situation.
Getting a secured loan to consolidate payday loan debt and other debts is the other option that you have. Home loans or home equity loans are a good option in this regard. You can go for a top-up loan on your current mortgage or use the home equity for cash out to pay for other loans (including your payday loans). These options are really good because the interest rate on such secured loans is much lower than the interest rate in case of unsecured loans. However, your home would be at stake in case you fail to pay the monthly installments.
Though debt consolidation for payday loans is possible, it is best to avoid going for payday loans unless you are sure of paying them back in 1-2 months timeframe. In fact, you should include an emergency fund as part of your financial planning so that the need for payday loan never arises.