A recent study in the financial market revealed that 39.2% of borrowers rely on personal loans for debt consolidation. This can be due to the borrowers having several installment loans and payday loans and the high interest rates and rollover charges beyond their budget.
Debt consolidation is essential in getting lower interest rates and associated payments. This guide elaborates on how consolidation functions for installment and payday loans.
What is Loan Consolidation?
Understanding how loan consolidation functions is the first step in figuring out how to relate it to installment and payday loans. debt consolidation is using money borrowed from a new lender to pay multiple lenders. By doing this you simplify the existing debt by committing to one monthly payment instead of dealing with multiple lenders.
The main objective of consolidation is a reduction in the interest rate charged and a lower total cost for the amount borrowed. Another option is using a longer debt consolidation loan hence achieving a lower and easily manageable monthly payment.
This latter method could lead to higher total interest charges at the end of the loan term. Debt consolidation has been effective for different types of loans including installment and payday loans.
Payday Loans and Installment Loan
There are many legitimate reasons why you may need to consolidate your installment and payday loans. These reasons may largely influence how effectively you consolidate the loans.
If it is challenging for you to manage your monthly payments with current debt obligations at hand, debt consolidation may turn to be the best option for you. In particular, this is most operational for borrowers having delinquency issues- delay in payment on loans that are already past the due date.
The delinquency rate for most installment loans averages at 3.31% while for payday loan rates at 6%.
Assuming you had a low credit score when you took installment or payday loans but you improve with time as you pay the loans, the chances of qualifying for a better loan offer or a better interest rate. Seeking financing solutions to benefit from such new terms may be a sound option.
Loan consolidation can be a good alternative if the combined interest rates on all debts are more significant than what a debt consolidation loan offers. On average, payday loans’ interest rates have 400% APR while personal loans range between 10% to 28%.
Payday Loans and Balance Transfer Credit Cards
If the main reason for looking for a debt consolidation plan is to benefit from low interest rates, a balance transfer credit card can be the best option for you. Simply, a balance transfer card lets you transfer your credit card debt to the balance transfer credit card. Other credit card firms allow you to allocate your existing loan to the balance transfer card.
This type of transaction is beneficial because credit cards typically have a 0% APR for some time for a balance transfer. The 0% APR is a promotional rate that lasts for a period between 12 and 20 months. By this, you can quickly pay your debt with no interest charged for the introductory period.
In general, the benefits of installment loans and consolidating payday are realized if the credit limit is higher than the combined amount of debt being transferred. You should read and understand the card’s fine prints for terms and conditions.
Also, considering transfer fees is vital; the APR for new purchasing done on the credit card, and the APR during expiration of promotional rates, in case paying the debt takes longer.
Payday Loan Consolidation Using Debt Management Plans
Another option for negotiating lower interest rates on loans and simplifying payments is using a debt management plan (DMP). The debt management plan is readily available through non-profit credit advising agencies.
This type of program works for borrowers with unsecured debts in large amounts but cannot be used to address student loans.
A typical debt management plan follows these steps:
- The credit counselor is the payer on your accounts.
- You will discuss with the credit counselor your financial condition to determine the best choice for you other than DMP.
- If you settle for the DMP, the counselor liaises with your creditors to negotiate on lower monthly payments, fees, and lower interest rates, or all of them.
- If the creditors and the financial counselor get into terms, you will pay the counseling agency which pays the creditors in return.
Another option for consolidating installment and payday loans is a debt consolidation loan which compared to your current loans has lower monthly payments or lower APR. A lower APR can lower your monthly payments or reduce the total dollar amount you owe in interest thus helping you comfortably manage your payments.
Consolidate Your Payday Loans Today
The simplified debt may also come with lower interest rates and favorable terms of payments than the payday loans. Where debt settlement can damage your credit, Encompass Recovery Group consolidation services can help organise a better credit score if you honor the established monthly payments.