How does payday loan consolidation work?
Payday loan consolidation occurs when a borrower has all of his payday loans combined into one loan so that there is only a single monthly payment. Once the borrower has chosen consolidation company a representative from that company will meet with the borrower to discuss monthly income and expenses and then help the borrower determine the amount of money that needs to set aside each month.
The borrower will then begin to deposit the amount determined into a savings account that is opened and managed by the consolidation company. Once the savings account reaches a certain balance the consolidation company will start to negotiate with the payday lenders on the borrower’s behalf in order to get a single monthly payment that is manageable for the borrower.
From start to finish a payday loan consolidation can take anywhere from 6 – 18 months depending on the following variables: how many lenders the borrower owes and the borrower’s monthly income and expenses. Although, there isn’t a magic wand that a borrower can wave to determine if a payday loan consolidation is right for him there are questions that the borrower can ask himself to determine if consolidation would possibly benefit him:
- Can the borrower repay the payday loans in full within the next 2 – 3 months without disturbing his budget?
- Can the borrower completely eliminate the need for payday loans within the next 3 months?
If the answer is no to either of the questions payday loan consolidation could possibly benefit the borrower.
However, before making the decision to utilize a payday loan consolidation company the borrower needs to be aware of the following facts:
- It’s a third-party payment system: The consolidation company does not make loans or settle a borrower’s debt. They simply act as a middleman to negotiate for the borrower and distribute funds to the borrower’s creditors until the creditors are paid in full.
- Payday loan consolidation companies range in quality: There are organizations that are designed to govern such companies such as the National Foundation for Credit Counseling (NFCC) and the Financial Counseling Association of America (FCAA) to ensure that these companies follow certain standards set forth by the Council on Accreditation including employee training and certification protocol but it would still be wise to be picky. A reliable company will be well organized, make timely payments on the borrower’s behalf, send statements to the borrower in a timely manner, and offer strong borrower education and support.
- All plans are created equal: Financial institutions don’t provide preferential treatment all plans are structured the same way. The consolidation representative will determine with the borrower what it will take for the borrower to fully repay his creditors in three to five years. The standard payment is typically based on 2.5% of the total amount owed but under some extenuating circumstances other arrangements can be made. The positive thing about these plans is that the borrower can pay more than the agreed upon amount when he has extra funds in order to get out of debt faster.
- Counseling before consolidation: Before jumping into consolidation a borrower should attend financial counseling to ensure that all other alternatives have been exhausted and that the borrower will have enough money remaining in his budget to pay his basic expenses. If the borrower has enough money left over after subtracting expenses from income consolidation as well as other options will be presented to the borrower. A good counselor will be knowledgeable, compassionate, and encouraging to the borrower. Therefore, if a borrower is presented with a counselor who acts bored, judgmental, or pushy it would be advisable for the borrower to request a different counselor.
- Consolidation is not right for everyone: The majority of the borrower’s balances should be in unsecured debts such as credit and charge cards, personal loans, and sometimes collection accounts. If the majority of the borrower’s debts are associated with taxes and/or child support these plans would be of no help.
Consolidation is simple, steady, and efficient: When a borrower is on a consolidation plan payments remain the same for the duration of the plan and he never has to wonder about the amount he is paying each month. Also, once consolidation begins calls from creditors usually end.
- Record maintenance isn’t over: Despite the consolidation agreement creditors will continue to send borrower’s account statements that the borrowers will have to monitor and possibly even send in. Agency reports will not reflect accruing interest so if the borrower fails to submit them the agencies balance will be drastically different from the borrower’s bank statements. This can leave the borrower in mound of debt even after the consolidation services have ended.
- Charging must stop until the consolidation is paid in full: A common agreement with all consolidation companies is that borrowers must close all accounts and not open any new ones until the borrower is debt-free.
- Consolidation is not the same as bankruptcy: Although borrowers are paying their debt in full lenders may still have a negative view on the service and the borrower’s credit report could still take a hit. Some creditors will notate that the debt is being paid through a third party which can be viewed negatively as if the borrower needed help paying his bills. Other creditors will look at consolidation as a positive thing because the borrower is making consistent and timely payments.
Clearly payday loan consolidation has positive and negative factors. It is important for the borrower to determine if this option is going to be a good decision or not and act accordingly. The one factor that is advisable prior to making any decision is that the borrower gathers as much information about his finances and options as possible to avoid making any hasty decisions.