Payday Loan Refinancing: Here’s What You Need To Know

Payday loans can seem like a lifeline for those who can’t wait for their next paycheck to pay a late bill, buy groceries or even fill the gas tank — particularly when other loans don’t seem like an option.

However, once the payday loan comes due, many borrowers find they can’t pay it back. This leads to a loan rollover or even a new payday loan from a different lender. Before they know it, they’re in over their heads. If you feel like you’re drowning in debt, payday loan refinance might be the best next move. To learn how to do it, read on.

Refinancing payday loan debt

When you refinance a payday loan, you’re taking a new loan to replace your current loan. Depending on the terms of the new loan, it could end up being better in the long run for your budget and individual needs.

If you’re struggling with payday loan debt, you’re not alone: the average payday loan has about $520 in fees for the initial loan of $375, and more than 80% of payday loans are rolled over. These rollovers reset the clock with a new set of fees and interest.

Also, 75% are taken by those who have used them before and 60% are taken once. More than 90% of payday loan borrowers end up regretting their original payday loan because they end up trapped in a cycle of debt.

Refinancing can sometimes help you escape that trap.

Better alternatives to payday loans

A payday loan is almost never your best option. There are products designed to offer quick emergency cash that don’t weigh you down with the same predatory terms. If you’re thinking about a payday loan — whether it’s your first, or you need a way to pay off an existing payday loan — check out these alternatives first.

Payday Alternative Loans

Payday Alternative Loans are similar to payday loans in structure and mechanics, but there’s one major difference — instead of using potentially shady lenders, PALs are given out through federal credit unions.

Typical lenders check credit reports, but for PALs, sometimes no credit check is required. Instead, credit unions often ask for a good membership standing and proof that you can make monthly payments on time. To obtain a PAL you’ll need to verify income, show pay stubs or checking or savings account statements.

It’s important to be aware that each credit union has qualification requirements, so check with a few before you make a decision.

Cash advance apps

Cash advance apps are fairly new financial services and not everyone is aware of them. Companies like Brigit or Dave offer small online loans to carry you over to your next payday. These are similar to payday loans, but a bit safer because they don’t charge interest. Instead, they ask you to tip them. Generally, these apps are free or charge a small monthly fee. The money is usually sent to your checking account by direct deposit by the next business day.

What is a payday loan?

A payday loan is an extremely short-term loan. The loan amount is small and is intended to be repaid in a single payment on the borrower’s next payday, or when income is received from another source I.e., pension or Social Security. The due date is two to four weeks from the date the loan was made. The specific due date is set in the payday loan agreement.

Payday loans are incredibly convenient. Eligibility is simple — there’s no credit check, so you’ll still qualify despite having bad credit. All you need is a bank account, a steady source of income, and a government ID. But that convenience comes with a high price: annual percentage rates can be higher than 600%.

Payday loans are so predatory in nature that they’re outlawed in several states, and many other states have implemented rate caps. While the legislation is intended to help protect consumers, it has led to an increase in the number of tribal lenders.

What’s a tribal lender?

Tribal payday loans are loans issued by payday lenders who claim to operate out of Native American reservations, though they’re almost always entirely online.

Because tribal lenders fall outside the jurisdiction of both state and federal laws, they can sidestep the limits. Some tribal lenders charge interest rates in excess of 1,000%.

How to refinance your payday loans

Payday loan debt consolidation rolls all your original loans into a single larger loan, ideally with lower interest rates and better repayment terms.

If you need to refinance a loan, carefully read your current agreement to see how much you’re paying.

Also check if there’s a prepayment penalty on the current loan, as the value of refinancing may outweigh the early termination cost.

After finding the value of the current loan, compare and contrast between lenders to find the best terms for your situation.

Many new online lenders compete with traditional banks, so there are services and packages for just about everyone. For the most qualified borrowers, finding the right fit could lower the loan substantially.

Debt Consolidation Loan (DIY consolidation)

You can consolidate your own debts for very little cost. All you need is a debt consolidation loan and a DIY consolidation is simple. The new loan is then used to pay back your other lenders.

If you have enough income to support credit card payments, there are two methods to reduce balances to zero.

The debt snowball method is when you pay all with credit card balances at their minimum monthly payments. Then you add other available funds to pay off a credit card with the largest balance.

The debt avalanche method is when you pay off all minimum monthly payments, and then use your additional funds to pay off the credit card with the highest APR.

Pros
  • Either the avalanche or snowball methods let you use budgeted funds toward credit card debt.
  • DIY debt consolidation does not require additional commitments to new lines of credit or loans.
  • Managing debt repayment DIY helps build a budgeted strategy for habitual savings that can continue after credit card debt has been paid off.
  • Paying credit card debt on time, keeping paid-off accounts open, and reducing balances versus credit limits can all contribute to higher credit scores.
Cons
  • It can be hard to qualify for a debt consolidation loan
  • You will need to fully understand loan terms to carry out the process
  • It can be hard to keep track of regular payments if you have a variable monthly income

Types of loans to help with debt consolidation

There are several loans to help you if you choose to debt consolidate now or in the future:

Credit card balance transfer or cash advance

A credit card balance transfer moves balances from one credit card to another. Consider this you want to save money on interest. Credit card companies sometimes offer 0% introductory APR balance transfer offers to attract customers.

If you decide to take a promo, you could transfer a balance from one card to the new card at 0%. The period of time that you won’t pay interest can range from 12 to 24 months, depending on the offer.

Pay the balance transfer off before the promotional period ends and you could save interest and get rid of debt quicker.

Unfortunately, this option will require fair to good credit in order to qualify for a new card that includes the introductory rate. Review your credit reports with the three major credit bureaus — Experian, Equifax and TransUnion — to ensure there are no negative entries or mistakes that could be dragging down your credit score.

A cash advance is an advance against your card’s credit limit and is a short-term loan you get from the credit card company. You’ll pay back what you borrow with interest.

Cash advances are separate from purchases or balance transfers; a different APR can apply to each.

Personal loans

A personal loan is a loan that is borrowed from a financial institution, credit union or online lender that you pay back in fixed payments. Because the loan terms are longer — they can range from one to seven years — your loan’s monthly payment can be less than making the minimum payment on several loans.

A personal loan can be a viable choice if you need money fast. However, know what the ins and out of a personal loan are before you commit. If you have bad credit, you’ll still have some loan options, but the interest rates will be significantly higher than what a borrower with good credit would pay.

Installment loans

An installment loan lets you borrow a specific amount of money at once and is repaid over a fixed number of payments, or “installments.” Because you have some say over determining the length of the loan, you can adjust the repayment time period based on what you can afford. A car loan is a good example of an installment loan. Terms can range from three to six years. If you choose a longer term, you’ll pay more in interest over the life of the loan, but your monthly payment will be smaller.

Peer-to-peer loans

Peer-to-peer (P2P) loans type of direct lending of money to someone or a business without an official financial institution acting as the go-between. It’s done through online platforms matching lenders with borrowers and offers secured and unsecured loans. You can also borrow money on Reddit through the r/borrow subreddit. Fellow Redditors will fund your loan request and you will pay them back on a prearranged date. These loans usually offer more flexibility to extend the loan if the payment date arrives and you still don’t have all of the cash.

Mortgage refinancing or home equity loans

If your home’s value is higher than it was when you purchased it, a cash-out refinance lets you refinance your mortgage at a new amount that’s higher than what you currently owe. After closing on the new mortgage, you take the extra cash. A home equity loan is like a personal loan, but it’s secured by your home. Home equity loans are usually much faster than refinancing, and they come in both fixed amounts and as a line of credit (HELOC.)

Benefits of payday loan consolidation

If you’re stuck in the payday loan trap, you can probably benefit from a payday loan consolidation plan. Here are some benefits:

Lower fees and interest rates

Payday loans can have unbelievably high-interest rates – some 300-400%. A typical credit card APR range is 20-30% means as a borrower you can fall easily into the payday loan vortex.

Flexible repayment terms

Unlike payday loans, which must be repaid within two to four weeks, personal loans offer various repayment terms from 12 to 84 months. You should be able to choose the term for your financial budget.

Looking for ways to get out of your payday loan? Here are a few options:

Alternatives to consolidation

You don’t need to consolidate your loans to get out of payday loan debt, but if you need relief and can’t get approved there are other options.

Read more: How to Get Out of Payday Loan Debt in 10 Steps.

Payday loan relief programs

This means working with a firm that will represent you to lenders, also referred to as a payday relief program, a debt settlement program, or a debt management program.

Each will charge a flat monthly fee and takes on the liability of paying lenders, so you don’t have to. Sometimes they negotiate with lenders to reduce fees and will pay lenders in advance.

Pros
  • Reducing the amount of debt you owe is always a positive thing
  • Experts can negotiate better terms for your loan
  • The monthly payments are simple
  • You can get help from experts
Cons
  • Too many scammers can take advantage of your situation
  • Some payday loan programs only work with certain lenders
  • You risk paying more in the long run

Work with a debt settlement company

Debt settlement companies promise to renegotiate, settle, or change the terms of a person’s debt to a creditor or debt collector.

Debt settlement programs usually work by negotiating with creditors on your behalf to pay off your debt at a lower amount than what you currently owe. The goal is to get a significant percentage of your debt forgiven.

As part of the process, many debt settlement companies will ask that you stop paying your creditors so negotiations are easier.

The debt settlement company usually requires you to put aside a specific amount of money each month for a particular amount of time—often 24 months or more—into a specific savings account. This money is used to pay the settled amounts.

It’s important to choose an experienced debt settlement company because some can end up harming your credit score and may result in creditors or debt collectors filing a lawsuit against you for defaulting on payments. Plus, if you stop making minimum payments on a credit card, late fees and interest are added to the debt monthly.

If you’re thinking about debt settlement, DebtHammer can help. Click here to schedule a free consultation.

Work with a credit counselor

An alternative to a settlement company is a nonprofit consumer credit counseling service. They work with creditors to create an affordable Debt Management Plan to get you out of debt and they know current guidelines and laws set by the Consumer Financial Protection Bureau. You can also visit here for where to find one. Though credit counseling is usually free, there is a small monthly fee for a Debt Management Plan.

Ask for extended repayment terms

Most storefront and online cash advance companies know they won’t get all their money back, which is why the interest rates are so high. Nevertheless, it never hurts to call your lender and ask for an extended payment plan with lower interest charges.

Talk to legal aid attorneys

A good lawyer can explain your debt settlement rights and give suggestions on how to get out of a payday loan. Also, they can determine whether bankruptcy is a viable option. Legal Aid offers a list of attorneys to help you find one in your area.

File Chapter 7 bankruptcy

More than 800,000 Americans a year file for bankruptcy. While it may seem like the answer, filing should be a last resort. There are costs associated with filing, so you’ll need to figure out whether filing is the best choice for your situation.

This legal process lets one discharge some or all of debt. Filing Chapter 7 Bankruptcy may result in asset seizures or wage garnishment and could damage credit scores. State law governs bankruptcy, so check to see your state’s criteria and seek a lawyer’s advice.

Why do my credit score and credit report matter?

Think of a credit score as a measure of trust: the higher the score, the more trust lenders and institutions will have in your paying back the loan. A good credit score can improve your financial well-being and make getting a mortgage, buying a car, or starting a business easier. It’s important that you know your credit score (there are plenty of free sources) and review your credit reports annually to ensure that they’re accurate. You can get one free copy per year at annualcreditreport.com.

The bottom line

If you’re stuck in the payday loan trap, refinancing could be a way out — especially if you have multiple payday loans or have borrowed through a tribal lender. It only takes a few extra steps to set up a new loan to pay off all of your other current debts. Once that’s set up, it will leave you with a bit of financial breathing room, as long as you don’t take on any new debt. Stash a few bucks away each month into an emergency fund so that you don’t necessarily need a loan the next time a crisis hits.

DebtHammer: Legitimate payday loan relief that works

Getting out of debt isn’t easy, but with the help of an expert, DebtHammer, it can be painless. We can reduce the total amount you owe by up to 80%, create an easy-to-understand plan with no hidden fees, and offer an easy monthly payment plan. Click here to start your free consultation.

FAQs

What’s a title loan?

It’s a secured loan allowing borrowers to use a vehicle as collateral. Because a vehicle secures the loan repayment, the lender can repossess the vehicle if the loan isn’t repaid on time.

Are payday loans legal in California?

In California, payday lenders can loan up to $300 and charge a maximum of $45 in fees.

What is the NMLS system?

The Nationwide Mortgage Licensing System and Registry is a Web-based platform for regulatory agencies to give initial license applications and ongoing compliance requirements.

What’s an origination fee?

It’s what a lender charges the borrower before setting up any loans. Prices vary depending on the lender, but there is a set amount within the United States. Known as discount fees, they never go more than 1% of the money borrowed in a loan.

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