What you need to know about payday loan consolidation programs
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Debt consolidation companies
There are various companies doing debt consolidation with each using a variety of methods. That is why it is important that consumers understand the differences in every plan.
Debt management, debt settlement, debt relief and debt negotiation are all different types of plans for consolidating debt. Each one has certain features that could help you solve your debt problem.
Consumers should decide which company meets their goal of eliminating debt. Some of them maintain in-house debt counseling to assist consumers. Others refer clients to a network of third-party companies, credit counselors and debt attorneys that offer solutions.
Importance of customer service
The importance of customer service is crucial when choosing a debt consolidation company to work with. Talking about financial problems is never easy, and the ability to speak freely with a credit counselor makes customers more comfortable.
A good debt relief company will provide clear answers, has a reputation for integrity and success. Their credit counselor should also be trained and certified by a state or national organization counselors.
It is better to know how credit counselors are compensated. Receiving bonuses for selling additional services is a red flag. The company should have your best interests at heart.
Most debt relief companies can help with settling unsecured debts, including credit card bills, unsecured personal loans, payday loans, medical and hospital bills, department store credit cards, accounts in collections and certain utility bills. Some of them require a minimum amount of unsecured debt of usually $7,500 or more.
Usually, debt consolidation companies can’t help with mortgages, secured personal loans or car loans.
Good customer service goes beyond helping their customers pay off the existing debt. It also involves understanding the root cause of the debt and how to avoid it in the future.
Importance of transparency
Many consumers seeking financial help have been exploited by misleading or false promises.
It’s easier to deal with a debt consolidation company that is transparent about its practices, terms and conditions. It should also be willing to provide information to verify whatever claims or guarantees it makes to its customers.
How to check a company’s transparency
The easiest way is to check its website. Standard information should be available on every debt consolidation company’s website. That includes how long the company has been in the business, a list of its top executives, the company’s physical address, hours of operation and phone number.
Other indications of transparency may include:
- Whether they offer loans or only credit counseling and programs like debt management plans or debt settlement
- A list of all the fees (origination fee, monthly fee, late payment fee) associated with loans or programs and the interest rates
- The time frame that takes to pay off the debt and whether there is a prepayment penalty
- Minimum amount of debt to qualify, a minimum credit score
- Whether you get a personal counselor and ways to interact with him
A reputable company should have no problem putting up all that information on its website.
Importance of the company’s longevity and trustworthiness
Although change could happen overnight in the loan market, a company’s longevity and trustworthiness still matter. If you are struggling to keep up with credit card debt or need help with bill consolidation, a company with a track record of success helps building confidence and trust.
Companies that have been in the market for 10–15 years have developed rapport and trust with their customers because their performance remains consistent and they provide customers with solutions.
Payday loan consolidation BBB accredited – most companies providing debt consolidation are accredited by the Better Business Bureau. BBB lists the number of complaints companies receive and how many of them were resolved. All these information could be very helpful in helping you make a final decision.
FTC rules and regulations regarding debt consolidation
The Federal Trade Commission (FTC) has enacted strict rule governing for-profit companies operating in the debt relief business. This is the Telemarketing Sales Rule (TSR) and it is meant to protect consumers from companies offering debt consolidation.
The most prominent provisions of the TSR are:
- Customers should not pay fees up front and companies can’t collect a fee for their services until they have satisfactorily settled or resolved their customer’s debts. Debtor and creditor must agree to a settlement in writing and the customer must make at least one payment to the creditor before the debt relief company can collect a fee. If the customer has multiple debts, the company may collect a fee for each debt settled, but none of them in advance of a settlement.
- A debt relief company should provide information about how long it will take to get results, how much the service will cost and what the negative aspects of using debt relief service will be.
- Companies are prohibited from making false or unsubstantiated claims about their services, especially about how much it costs and what percentage of their customers have gotten positive results.
How to avoid debt consolidation scams
The debt relief business is known for scams. There are several warning signs. Some of them include:
- Some companies claim to be non-profit but they’re actually a for-profit business
- Some companies offer guarantees to settle your debt for pennies on the dollar
- Some of them seek fees for services before signing any written agreement with your creditors
- Some use aggressive sales pitches, asking you to act quickly on a decision that requires time
- Some promise a “quick fix” solution when in reality all programs take between three and five years
Payday loan debt consolidation
Payday loans seem like an appropriate solution for people in emergency situations, but often they are the beginning of a downhill financial slide. A study by the Consumer Financial Protection Bureau (CFPB) showed that 80% of payday loans get rolled over within two weeks, meaning the principal and interest — usually 300% APR or higher — haven’t been paid. And so, the debt grows. The same research showed that 50% of payday loans get rolled over up to 10 times.
A better solution would be payday debt consolidation, that is rolling the various loans into one payment. Payday loan relief companies focus on people with financial problems. The interest rate they charge is considerable, but it is much less than the average 391% APR which some payday loans have.
Also, payday loan debt consolidation companies may help their customers get into a debt management program. This means that the customer can pay off the amount over an extended period of time.
Another form of payday loan consolidation is using a credit card to get a cash advance. It would be used to retire the payday loan.
Counseling and education
It should be noted that turning to a debt consolidation company can have educational benefits for the customer. He has to learn from the experience to avoid future financial problems.
Educating and counseling consumers is the job of the non-profit organizations involved in debt consolidation. They are required by the Internal Revenue Service to provide an educational aspect to their service in order to retain their tax-exempt status as 501(c) (3) organizations.
They offer credit counseling, usually at no cost. Counselors review a consumer’s finances, focusing on the source of the financial problems and how managing budgets solve it.
They review this information and offer recommendations such as a debt management plan, debt settlement, or even bankruptcy if needed.
Customers can contact the National Federation for Credit Counseling (NFCC) if they have questions about certification.
Choosing a debt consolidation company
This involves research and understanding of the situation. The best solution happens when the customer knows what resources are available to him and which debt consolidation program provides them.
For example, if the client has enough money but needs more time to pay off, a debt management program is a better choice than debt settlement. However, if he is trying to eliminate payday loans, a company that specializes in debt settlement could be an appropriate solution.
In order to make the right choice, the debtor should know the definitions for the various debt consolidation programs so that he doesn’t confuse them. It’s important to find the company that offers the exact type of debt consolidation program that he need, makes him comfortable dealing with their staff and requirements, and educate him so he never has to return.
Payday debt consolidation loans and relief programs
How will you know if you are working with a legitimate payday debt consolidation company? How to decide whether to try to reduce your balance through a debt relief program, or attempt to pay it off with lower monthly payments from a long-term installment loan?
People with bad credit prefer a debt relief program. For them it is very difficult to gain approval for a new borrowing account that combines multiple payday loans from different companies into one monthly payment.
Choosing the right payday cash advance consolidation service is often more important and harder than choosing the right consolidation company. Many legitimate companies can appear to be scams if you begin with unrealistic expectations, or choose an inappropriate option.
Here are the pros, cons and eligibility criteria for payday debt assistance and loan consolidation.
- Payday debt relief programs and companies
A debt relief program is the most direct form of financial help with payday loan obligations. A settlement company negotiates with lenders on behalf of their customers. A settlement occurs when the lender agrees to accept less than full payment.
Initially, the borrower makes regular payments to the settlement company to build a modest amount held in an escrow account. Money held in the escrow account improves the borrower’s bargaining position.
Benefits of debt settlement
The primary benefit of a debt relief program is that it allows the borrower to eliminate his obligations for a fraction of what he already owes. The lender agrees to accept partial payment, stops the collections and stops renewing the payday loans and charging rollover fees every pay period.
Paying off only a partial amount is better than paying off the full balance. The company may also assist in developing a debt management plan for managing the borrower’s finances more responsibly in the future.
Drawbacks of debt settlement
Firstly, debt settlement for payday loans takes time to accumulate sufficient funds in the borrower’s escrow account. He will accumulate additional rollover fees as they often renew weekly or biweekly. They add up very quickly.
Secondly, the lender will report any forgiven debt as income to the IRS. The borrower may need to make an additional tax payment. However, such borrowers often have low incomes and owe very low taxes.
Thirdly, the settled debt may appear as a negative mark on the borrower’s consumer report and hurt his credit score. However, since forgiven balances already appear as late payments, the impact to the score is negligible and will disappear from the consumer report at the same time – 7 years after the date of the first delinquency.
Bad credit qualifications
People with bad credit history and negative marks on their consumer report qualify easily for a settlement program because there is no minimum credit score requirement.
The qualifying criteria include several requirements. The borrower should owe more than $7,500 in unsecured obligations, like personal loans, credit cards, payday cash advances and others. The borrower should be currently behind on payments by at least three months. He is experiencing a financial hardship due to a loss of income and/or unexpected bills.
The settlement company of choice should have a positive rating from the Better Business Bureau. Most reliable online companies will display the BBB logo on their website.
The federal government has a list of approved companies providing debt management, credit counseling and debt education. Non-profit status means that the organization enjoys a tax exemption, but it doesn’t mean it is trustworthy.
- Combining payday loans into single monthly payments
Debt consolidation loans allow debtors to combine several payday loans from different lenders into a single monthly payment. New borrowing does not reduce the principal balance on their obligations. The borrower can choose to combine his deferred deposit transactions into a long-term installment loan, or by transferring his principal amount into a revolving account. Each approach has its advantages and disadvantages.
- Installment loan consolidations
One option for combining payday loans from several different companies into one monthly payment is long-term installment loans. The customer has to repay an installment contract with a set number of periodic payments that are fixed. They have various names, each with its unique repayment timeframe:
|#||Installment Type||Repayment Timeframe|
|1||Payday cash advance||Weeks|
Installment loans benefits
The first benefit of installment loans is their lower monthly payments. They have a balloon payment that comes due in full when the borrower’s employer cuts payroll. That is weekly, bi-weekly, or bi-monthly. The borrower owes the full principal amount which makes the payment quite large.
Long-term contracts have lower monthly payments because the principal is spread over a longer period. There may be 6, 12, 24, 36 or more months to repay what the borrower owes, instead of just weeks. This makes payments easier to manage.
The second benefit is the lower interest rates. Weekly payday installment loans have rollover fees which the lender imposes if the borrower can’t repay the entire balance in full. These rollover fees are relatively small, but the annual percentage interest rate is very large.
Long-term installment loans only have one upfront origination fee that is paid once rather than every pay cycle. There are also periodic interest charges but the rate tops out at 35% for the least qualified approved borrowers.
Installment loan drawbacks
Consolidating weekly payday installment loans into long-term contracts has one important drawback – this doesn’t reduce the principal balance but only restructures the terms of the obligation.
This can lead to problems if the borrower encounters another cash shortage. There is no obstacle for taking out another deferred deposit transaction when the next cash emergency arrives. If that happens, the borrower will owe more money and will have both short-term and long-term installment payments to make.
Bad credit history
Borrowers with bad credit history usually don’t qualify for consolidating payday cash advances into a new long-term installment loan. Lenders always want a copy of the consumer report and frequently deny applicants with low credit scores.
Every applicant must demonstrate sufficient income to handle the monthly payments. The lender will calculate a debt-to-income ratio, thus excluding anyone unemployed or between jobs. People with bad credit must perform extremely well on this test.
Installment loan types
There are several types of long-term installment loans to combine multiple payday obligations into a single monthly payment. The longer the repayment term is, the lower the amount the borrower owes each period, but the higher the interest costs will be.
- Unsecured personal installment loans: They do not require collateral. Application process could be done online. They have a single origination fee and repayment period from 6 to 60 months depending on eligibility
- Automotive financing: This is a secured installment loan and requires the borrower’s vehicle as collateral. Refinancing is an option if he owes less than the wholesale value of the vehicle. It may be taken out online, but may require some verification. Repayment period is between 1 to 5 years
- Mortgages: These are another form of secured installment loans. They require the borrower’s home as collateral. It is possible to refinance the mortgage or take out a second mortgage. The closing costs are often very high, but their interest rates are the lowest. Repayment period is from 10 to 30 years.
- Revolving account consolidations
Revolving accounts are also an option to combine several payday loans into a single monthly payment. A revolving account allows deferring payment on part of the outstanding balance every month. The two most common revolving account types are a credit card and a home equity line of credit.
Credit card revolving balance transfer checks are an option to combine multiple payday loans into a single monthly payment. The customer must have sufficient open to buy to afford this. The open to buy is the difference between the account limit and the existing balance. The balance transfer check could be used to pay off all payday cash advances to avoid further rollover fees. Although revolving a credit card balance allows interest charges to accumulate fast, the projected APR is much lower than the alternative.
It can take years to pay off the revolving credit card balance and it may be more costly in the end. Moreover, for consumers with bad credit history, it is difficult to qualify for a new credit card account.
- Home equity line of credit (HELOC) is the final option to consolidate multiple payday loans into one lower monthly payment. With it, the borrower opens a revolving account secured by the equity in his home. In order to pay off the deferred deposit balances during the draw period which can last for up to 10 years, the borrower withdraws funds from the HELOC account. The amount is repaid with interest during extended repayment periods.
However, it is difficult for borrowers with bad credit history to qualify for an HELOC. The customer has to be a homeowner with sufficient equity, sufficient income and has excellent rating.