Payday Loan Consolidation: What It Is and How It Works

Payday loans are expensive, high-interest loans with short repayment periods that can be difficult to repay on time. Borrowers who are unable to make payments may opt to roll over their loan for a fee. With enough rollovers, this could mean owing more than the initial loan amount.

If you’re struggling to manage multiple payday loan payments, payday loan consolidation may be an option to consider.

What is payday loan consolidation?

Payday loan consolidation is when you combine multiple existing payday loans under one new personal loan, which you pay off in monthly installments at a lower interest rate.

Consolidating payday loans with a lower-interest personal loan gives you a longer repayment period and small monthly payments that are easier to manage. In addition, paying down one loan instead of multiple can feel less overwhelming and help you stick to your debt payoff plan.

How does payday loan consolidation work?

If you want to consolidate payday loans, you’ll need to apply for a personal loan from a credit union, online lender or bank.

Once approved for a personal loan, you’ll receive a lump sum of money that you'll use to pay off your payday lenders. You’ll then make monthly payments on your new personal loan until that loan is paid in full.

When is payday loan consolidation a good idea?

As long as you can qualify for a personal loan at a lower interest rate than your payday debts and afford the monthly installments, payday loan consolidation is generally a good idea.

Payday loans typically have fees that equate to extraordinarily high annual percentage rates — typically around 400% — which is why financial experts consider them a toxic form of debt for many borrowers.

Though personal loans can also have high APRs, they don’t exceed 36%, which is the maximum APR consumer advocates say an affordable loan can have.

Personal loans also have more forgiving repayment terms. Unlike payday loans, which are usually due in full on the borrower’s next payday, personal loans are paid off in monthly installments with terms ranging from two to seven years. Though this may mean a longer loan, it can offer a clearer path out of debt since installments are small and they don’t change over the course of the loan.

For example, for a $1,000 personal loan at 23% APR with a three-year repayment term, you’ll make monthly installments of $38.71. The loan will cost about $394 in total interest.

» MORE: How to get out of a payday loan nightmare

How to consolidate payday loans

1. Add up your payday loan balances

Your first step in consolidating payday loans is to add up your current balances for all payday loan debt. Personal loan amounts vary, but typically start around $1,000, so you’ll need at least $1,000 in payday debt to apply.

2. Shop around for the best loan

Once you know the amount you need to pay off your debts, shop around and compare loan options from different lenders.

Personal loans are offered at credit unions, online lenders and some banks. Credit unions and online lenders may give favorable rates and terms to applicants with short or no credit history or bad credit scores (629 credit score or lower) than banks.

» COMPARE: Best consolidation loans for bad credit

3. Pre-qualify

One of the best ways to compare loan offers is to pre-qualify. This is a short process that lets you see what loan amount, rate and term you may qualify for without hurting your credit score. Not all lenders offer pre-qualification, but most online lenders do.

You can pre-qualify with NerdWallet to check your rate with online lenders.

4. Apply for the loan and receive funds

Once you’ve chosen a lender, it’s time to apply. Applying for a personal loan includes filling out an application, usually online, with personal information like your Social Security number, address and contact details. You may also need to submit documentation, including proof of identity, employment and income.

If your application is approved, you’ll sign the loan agreement and receive funds typically within one week, though some lenders fund the same day you’re approved.

5. Pay off lenders and begin repayment on your personal loan

Once you have the money, go to each payday lender and pay off your individual debts. This step is the most important; if you skip it and use the money elsewhere, you’ll end up even deeper in debt.

Once your debts are paid off, make a plan to pay off your personal loan. Missed payments can mean a late fee and because lenders report payments to the three major credit bureaus, payments that are 30 or more days late will jeopardize your credit score.

Other ways to pay off your payday loans

If you don’t want to consolidate payday loans, or aren’t approved for a personal loan, consider these other options for getting out of payday debt.

• Nonprofit credit counseling: Nonprofit organizations offer financial counseling for those who struggle with debt. Though not all counselors may be able to negotiate with payday lenders directly, they can look at your overall financial picture and evaluate the best options for addressing payday debt. Some nonprofit credit counseling services are free, while others may require a fee.

• Borrow from family or friends: Close family and friends may be a resource if they’re willing to spot you emergency cash to repay your payday loans. Make sure to draw up a loan agreement to avoid any miscommunication about when and how you’ll pay them back.

• Ask about extended repayment: Some lenders may offer an extended repayment plan, which lets you make smaller payments over a longer period of time. This option might carry an additional fee, and terms can vary by state and lender.

Payday loan alternatives when you need cash fast

One way to avoid having to take a payday loan in the future is to build an emergency fund, which is cash set aside to cover unexpected expenses. Even a $500 emergency fund can keep you out of payday debt.

Building an emergency fund takes time, though, so if you need immediate cash, these alternatives are less predatory than payday loans and don’t require good credit.

• Payday alternative loans: PALs allow federal credit union members to borrow small amounts of money at a lower cost and longer term compared to payday loans. You’ll need to become a member of the credit union to apply.

• Cash-advance apps: Mobile apps like Dave, EarnIn and Brigit provide cash advances with fees that are usually lower than payday loan fees.

• Local financial assistance programs: Many nonprofits and religious organizations offer emergency funds for essential expenses like utilities, groceries or rent. See NerdWallet’s database of local payday loan alternatives to learn what’s available in your state.

• “Buy now, pay later” payment plans: BNPL providers like Afterpay, Affirm and Klarna offer pay-in-four payment plans with zero interest. These apps can cover a necessary purchase you can’t afford upfront, but beware of overspending.

• Small-dollar loans: Some credit unions and banks, like Bank of America, Wells Fargo and U.S. Bank, offer small-dollar loans at lower rates than payday loans. If you have a good relationship with your credit union or bank, you may have a better chance of approval.