What is Payday Loan Consolidation?

Inside Subprime: Jan 07, 2018

By Grace Austin

Millions of Americans turn to payday loans as an easy way to access cash. But these high-interest, short-term loans can have severe consequences — many borrowers end up in a predatory cycle of debt in which loans are never paid off.

If a borrower doesn’t pay back a loan on time, they can go into default, which can mean more fees, more penalties and even potential legal action against them. That can also result in harassing phone calls from debt collectors. And payday loans are usually debited straight from a borrower’s checking account, which means they will continue to be taken out in perpetuity and can result in overdraft fees that often cost $30 per transaction.

There are several options for those looking for a way to pay mounting payday loan debt, but one of the most frequently advertised is payday loan consolidation.

Payday loan consolidation occurs when a borrower reaches out to a financial services company to negotiate down all payday loans they currently have. That company will usually look into the overall financial situation of the borrower and lump together all outstanding payday loan debts, typically into one monthly payment.

Those who are selling payday loan consolidation plans market it as a peace-of-mind step to make one, monthly payment that will stop debt collectors from bothering borrowers. Some businesses offering payday loan consolidation say they’ll prevent payday lenders from continuing to autodraft payments and fees from borrowers’ checking accounts, too.

But experts say that businesses offering payday loan consolidation can sometimes be fraudulent, leaving consumers in a worse state than before they took out payday loans, with bad credit and more debt. These scammers can take advantage of people in a financially anxious state of mind looking for quick solutions to payday loan debt.

Payday loan consolidation companies cannot require an upfront fee legally; they’re only allowed to charge after they receive a settlement and a borrower starts paying on that plan. That’s according to the Federal Trade Commission.

Those marketing plans of reducing debt greatly overnight can also be a scam, since one of the only options to do that is through bankruptcy. Consumers should be weary of these claims since it’s nearly impossible to get rid of so much debt immediately.

Scammers often can pose as nonprofit organizations. Some of these businesses are actually for-profit companies, which the FTC has gone after in the past.

Genuine businesses should be doing extensive research into a borrower’s financial history in order to set up a correct payment plan. Those that don’t could be fraudulent. And those businesses that are reputable should be backed by consumer advocates like the Better Business Bureau. Payday loan consolidation companies should also be working directly with creditors.

Payday loan consolidation can be expensive — even if the businesses are reputable, they will charge a percentage of the total debt, and there could be additional monthly and initial fees. If a borrower is going to use a payday loan consolidation company, they should be aware of the cost and be weary of hidden charges.

For more information on payday loans, scams, and cash advances and check out our state financial guides including California, Florida, Illinois, Texas and more.

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