Can debt consolidation help with payday loans?

Can debt consolidation help with payday loans?

Posted 9 June 2020. Categories: Personal Finance.

If you need money fast, a short-term payday loan can seem like a tempting option. But if you don't make your loan repayments on time, your situation could quickly become much worse and you'll be paying back a lot more than you borrowed.

If you're struggling to keep on top of a payday loan, the last thing you should do is take out another high-interest loan to cover it. Alternatives such as debt consolidation can help to ease the burden, and may be available even if you have bad credit.

Why are payday loans bad?

Short-term 'payday' loans are so called because they offer quick cash that's normally paid back when the borrower next gets paid. But there's a catch – payday loans are very expensive.

Compared to a standard personal loan that's calculated based on your individual circumstances, payday loans start out with a high interest rate (often 20%) that increases every month. If you miss your repayment deadline, you'll be hit with more expensive fees. This will also harm your credit rating, which can make it more difficult to apply for finance in the future.

If you need money urgently, and you're confident that you'll be able to pay it back on time, payday loans can be an option when they're used responsibly – as long as know what you're getting into.

Unfortunately, these loans are often taken out by people who are already struggling with their finances. Consumer groups in Australia are pressuring the government to crack down on payday lenders, which are seen as targeting the most vulnerable members of society and trapping them in a spiral of debt that can be hard to escape.

How can debt consolidation help?

Interest charges and penalties for missing payment deadlines on a payday loan can add up quickly, so it's important to pay back the loan as soon as possible.

For many people, the most effective way is through debt consolidation. This is a type of personal loan that takes over your existing debts (including payday loans, credit card repayments and other debt), so you only have to make one monthly payment.

Compared to payday loans, a debt consolidation loan has:

  • Lower interest rate and charges
  • Lower monthly repayments
  • Longer repayment term (usually 3 to 5 years)

You still need to keep up with your regular repayments with a consolidation loan, but you can arrange a payment amount with your loan provider that's affordable within your budget, so you shouldn't be out of pocket.

If you do miss a payment, the charges won't be as expensive as with a payday loan, but it's still important to get back on track as soon as you can. Making your repayments on time will also improve your credit score, which helps your financial future.

However much you need to borrow, Harmoney offers unsecured debt consolidation loans from $2,000 to $70,000, starting from 6.99% APR. The amount you can borrow and how much interest you need to pay will be calculated based on your personal circumstances. Try our personal loans calculator to see how much you could borrow.

Other ways to get out of payday debt

If you don't think debt consolidation is right for you, there may be alternatives to help you pay off your payday loan faster. However, these are not quick fixes and approval depends on your financial situation.

Credit card balance transfer – some credit card companies allow personal loan debt to be transferred to a credit card. These may start out with low interest or even interest free, but will revert to a high interest rate once the introductory period is over. You need to have good credit to be approved for a balance transfer credit card.

Debt agreement – if you can't find a way to pay off your debt, you can contact your payday lender and ask for assistance for financial hardship. This may lead to a formal debt agreement, which could make your loan more affordable, but will harm your credit for the long term. This can make it harder to apply for other forms of finance in the future.

Get financial advice – if you're feeling financial stress and not sure what to do, you can talk to an expert or call the National Debt Helpline on 1800 007 007.