Payday loan consolidation

Payday loan consolidation involves moving some or all your payday loans to one place.  For example, if eligible, you could use a low-interest loan or credit card to clear your existing debts. This could mean you only have one monthly repayment to one lender.

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What is a payday loan  

A payday loan is a short-term loan of up to £1,000 that is typically due to be repaid in full (plus interest) within a month. These loans tend to be used as a stopgap to cover unexpected expenses. 

Although payday loans are easy to access, they usually come with much higher interest rates than other types of credit, such as debt consolidation loans.  

Paying back a payday loan 

Most lenders will set up a Continuous Payment Authority (or recurring payment) when you take out a payday loan. A CPA allows them to automatically take money from your bank account on an agreed date.  

This can be helpful, but if you don’t have enough funds available, you could go into your overdraft and incur bank charges. If their first attempt is declined, they may try again, but they shouldn’t attempt more than twice 

What happens if you don’t pay back a payday loan? 

Missed payments will stay on your credit file for six years and may affect your ability to get credit in the future. Plus, lenders may add late charges and contact you for payment. If you continue not to pay, they could pass your debt to a debt collection agency. So, if you’re struggling, it’s best to speak to your lender as soon as possible to ask them for help, such as more time to pay. 

What is the payday loan price cap?  

The price cap introduced by the FCA in 2015 limits the interest and fees that payday loan companies can charge. By law, there is now:  

  • an initial cost cap of 0.8% per day meaning the maximum lenders can charge is 80p a day in interest and fees for every £100 you borrow. The longer your loan term is (they can run up to several months), the more interest you will pay overall. 

  • a total cost cap of 100% - meaning you shouldn’t have to pay more than twice the amount you have borrowed. (For example, if you get a £100 loan, the most you would pay is £200, including interest and fees). 

  • a maximum default charge of £15 - if you default on your loan. 

Despite these changes to the law, interest rates on payday loans continue to be higher than on most other forms of credit. 

How does payday loan consolidation work? 

Payday loan consolidation is designed to help you get on top of outstanding payday loans by moving them into one place. That could mean one monthly payment and one lender going forward.  

There are a few steps involved:

  1. Ask your payday lenders for settlement figures
  2. Calculate how much you owe in total
  3. Check your eligibility for an unsecured loan or credit card equal to the total debt – and see if you can get a lower interest rate
  4. Make an application, if affordable
  5. If approved, clear your payday loans with the funds

Pros and cons of a debt consolidation loan  

Whether or not debt consolidation is right for you depends on your individual circumstances. Let’s look at the advantages and disadvantages.  

Pros 

Cons 

All your debts could be moved to one place, so you only need to make one monthly payment to one lender. 

May not be worthwhile if you have a smaller amount of outstanding debt. 

You might be eligible for a better interest rate on a personal loan or credit card, making debt consolidation a cheaper option.  

The best rates tend to be offered to those with the highest credit scores. 

You may have a lower monthly repayment. 

If you spread payments over a longer term, you may increase the amount of interest you pay in total.  

Your credit rating should improve if you always pay on time

Missed payments can affect your credit score and ability to get finance. And charges may apply. 

 

How does payday loan consolidation affect my credit score  

Payday loan consolidation can affect your credit score positively or negatively, depending on a few factors. 

When you apply for any type of credit (including a debt consolidation loan), the lender will carry out a hard search of your credit report. They will look at how well you’ve managed your finances in the past to see how risky it could be to lend to you. This hard search, combined with the new debt being added to your report, may temporarily impact your credit score.   

Any missed payments will damage your credit score and stay on your file for six years. However, if consolidating your debt means you can manage your money better and you always pay your bills on time, then your credit score should improve. This can also show lenders that you are a reliable borrower, which might make it easier to get approved for finance in the future. 

What can I do if I’m struggling to pay back my payday loans?  

If you’re in financial difficulty, consider contacting your lenders directly. 

Some payday loan companies may offer what is known as a ‘payday loan rollover’. This means the loan is rolled over to another month to give you more time to pay. Lenders should not offer you more than two rollovers. This process involves making a new agreement for the repayment of the original loan. Extending your loan in this way can mean you pay more interest and charges overall.  

Alternatively, you can seek free, independent financial advice from: 

An independent debt adviser should always act in your best interests and help you find a solution that’s suitable for your individual needs. They may also be able to negotiate with lenders on your behalf to arrange a reduced payment plan and stop debt collection action.  

But making lower repayments can affect your credit score, so take this into consideration before deciding how to proceed.  

If you intend to work with a debt adviser, be sure to let your payday loan lenders know so that they give you some breathing space to set up a plan.

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Verity Hogan, Personal Finance Writer

Verity Hogan

Personal Finance Writer

Verity is a personal finance writer and journalist with over 13 years of experience working in a variety of industries, including 3 years specialising in motoring and debt. She contributes engaging, informative guides on everything you need to know on debt consolidation and car finance for Ocean.