Payday loans are a very expensive way to borrow money. The annual interest rate on these loans can be in the hundreds, even thousands, of percent. With debt consolidation, the borrower takes out a single low-interest loan and uses that money to pay off several smaller, high-interest debts. While this may sound like an ideal option, if you are relying on payday loans to get you through to the end of the month, you probably do not have the credit score to qualify for an affordable debt consolidation loan.
Payday Loans
Payday loans are small, high interest, short-term loans. Borrowers use them to make ends meet towards the end of the month, while waiting to get paid. The interest rates on these loans can be in the thousands of percent. In other words, a loan of $100 can actually cost you well over $1,000 to pay off. People who use these loans often don't have other options. Either their credit score is too low to get mainstream credit, or they may not have a credit history at all. Payday loans should only be used in extreme emergencies, such as when you need money to repair your car so you can get to work. Paying an extortionate interest rate on the loan is preferable to losing the job. In less extreme circumstances, borrowers should do whatever they can to avoid taking on this type of debt.
Debt Consolidation
The concept of debt consolidation is simple. You take out a single, low-interest loan. You use that money to pay off high-interest debt, such as credit cards and personal loans. Instead of many high-interest payments, you are left with a single monthly payment. It's easier to keep track of one payment, so you are less likely to forget to make it. With the lower interest rate, you can be debt-free sooner.
Drawbacks of Debt Consolidation
There are many downsides to debt consolidation plans. If you are in debt and are struggling to pay your bills each month, chances are that your credit history is less-than-perfect. That means that you will have a hard time getting the low-interest loan you need to consolidate your debt. Some people opt for secured loans, putting up their homes as collateral to get a lower interest rate. It's dangerous and unwise to convert unsecured debt into secured debt. The interest rate may be lower, but you could lose your home. Moreover, debt consolidation loans are sometimes less desirable than they seem. Even if the interest rate is acceptable, there may be many hidden feels that will make debt consolidation very expensive.
Payday Loans and Debt Consolidation
The only times debt consolidation makes sense is if you can get a low-interest loan. If you are using payday loans, you probably do not have the credit score to qualify for such a loan. If you do have a decent score, you should not use payday loans at all. Instead, consider cheaper borrowing options, such as credit cards and personal loans from major banks. Pay off the payday loans as soon as you can.
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