Payday Loans and Debt Consolidation

Explore options to eliminate payday loans so you can regain stability.

Love them or hate them, payday loans have become a staple of borrowing in the United States. This infographic looks at how Americans use payday loans. Below we explore payday loans and debt consolidation options to see how you can consolidate these loans with other unsecured debts.

Consolidated Credit infographic exploring payday loan statistics

The Troubled Waters of Payday Loans

Understanding the financial and credit impact of payday loans on consumers.
Crowded Seas
36 states allow payday lenders to operate in their state

12 million Americans take out payday loans each year

They borrow $9 billion each year

Adults age 25-49 are the most likely to use payday loans

The average borrower earns only $30,000 per year

80% of payday loans are taken out within 2 weeks of the borrower paying off another payday loan
The Challenge of Staying Afloat
Over 80% of payday loans are rolled over or re-borrowed

$55 the average fee on a 2-week loan

The average payday loan has $520 in fees for borrowing $375 initially

The average payday borrower takes out 10 loans per year and spends 199 out of 365 days in debt

Only 14% of payday loan borrowers can afford to repay the loan

The average loan requires a payment of $430 from the next paycheck, equating to 36% of the borrower’s gross pay
Drowning in Debt
What do borrowers use payday loans to cover?
69% recurring expenses
53% regular expenses
10% rent/mortgage
5% food
16% unexpected/emergency expense
8% “something special”
5% other
2% don’t know
What would borrowers do if payday loans weren’t available?
81% cut back on expenses
62% delay paying some bills
57% borrow from family/friends
57% sell/pawn personal possessions
44% get a loan from bank/credit union
37% use a credit card
17% borrow from employer
Sources:
http://www.forbes.com/sites/norbertmichel/2015/10/06/cfpb-should-leave-payday-loan-customers-alone/#d306f8070c39
http://www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs_assets/2012/pewpaydaylendingreportpdf.pdf
http://files.consumerfinance.gov/f/2012/01/Short-Term-Small-Dollar-Lending-Examination-Manual.pdf
https://lendedu.com/blog/payday-loan-statistics/
https://www.pewtrusts.org/en/research-and-analysis/video/2013/payday-loans-who-uses-them-and-why
https://www.opploans.com/blog/5-alarming-stats-payday-loans/

Pros and cons of payday loans

Payday loans can be used without creating serious financial challenges. They have advantages over traditional lending methods. They offer as faster loan approval with no credit check and low dollar amount loans that can be as low as $500.

However, the structure of these short-term loans means borrowers often face high finance and interest charges. Payday loans can also cause problems with cash flow management due to the automatic ACH payment structure. Payments are usually withdrawn automatically. As a result, payday loans often lead to NSF (non-sufficient fund fees) and account overdrafts.

Why payday loans are problematic

Problems with payday loans usually arise when the borrower fails to pay back the full amount borrowed within the first payment cycle. Payday loans usually have a 2-week term; that means you are supposed to pay back what you borrow within a single paycheck cycle (hence the name “payday loan”).

Payday loans are intended to cover unexpected emergencies if a borrower doesn’t have the cash flow or savings available. For instance, if your water heater breaks on a Tuesday and you don’t get paid again until next Friday, you borrow $500 to cover the repair. Then you pay the money back when your paycheck clears your bank account.

However, as you can see from the infographic above, payday loans often used to cover regular recurring expenses. That kind of budget imbalance usually signals larger financial troubles beneath the surface. In this case, the borrower may struggle to pay off the balance in the first billing cycle. Then interest charges are applied and a cycle of debt starts. It can quickly turn into a downward spiral.

Get out of payday loans with debt consolidation

Payday loan consolidation is possible in some cases, depending on which method of debt consolidation you use and which lenders service your payday loans.

Payday loan consolidation option 1: Debt consolidation loan

A personal debt consolidation loan is a do-it-yourself method of debt consolidation. You take out a loan and use the funds you receive to pay off your debts in-full.  You need a good credit score to qualify. This means it’s not always a viable option for borrowers who bank on the no credit check benefit of payday loans because of bad credit.

However, if you took out a few quick payday loans to cover expenses but you actually have the good credit necessary to qualify for a traditional loan, then a debt consolidation loan can be an avenue to consolidate payday loans.

Payday loan consolidation option 2: Debt management program

When you enroll in a debt management program, part of the service involves the credit counseling team calling each of your creditors to negotiate. They advocate the inclusion of each particular debt in the program to get the creditor’s approval. At the same time, they negotiate lower interest rates and to stop new penalty assessments.

Payday loans can be included in your program as long as each lender signs off on it. There is no mandate for lenders to agree when you sign up for a debt management program. Credit counseling agencies also don’t have standing relationships with many payday lenders as they do with other major credit issuers. However, in many cases, a payday lender may agree that their debt can be included when you enroll.

Written by :
Meghan Alard [email protected] Financial Literacy Specialist