Payday loan consolidation: real loans vs. relief companies

Payday loan consolidation can mean two very different things. One is a new, cheaper loan, such as a credit union payday alternative loan capped at 28%, that pays off your payday loans so you make one affordable payment. The other is a “payday relief” company that takes your money and promises to deal with the lenders. The first can save you hundreds of dollars in fees. The second is the kind of operation the FTC has shut down.

Real consolidation: one cheaper loan

A consolidation loan works when it does two things: it costs less than what you’re paying now, and it has a fixed end date.

The obvious place to look is a federal credit union. A payday alternative loan II can be up to $2,000 over 1 to 12 months, at no more than 28% a year and a $20 application fee at most, with no membership wait (NCUA rule). That’s often enough to clear one or two payday loans in one go.

A bank or a credit union may also offer an ordinary personal loan. Before you take one, compare the total cost, not the monthly payment. Ask for the APR, every fee and the term in writing.

When the math works

Say you have $900 in payday loans across a couple of lenders, each charging $15 per $100 per two weeks. You’re renewing because you can’t pay the balances.

• Keep renewing: $15 × 9 = $135 in fees every two weeks. Over 12 months, that’s 26 renewals and $3,510 in fees, and you’d still owe the $900.
• Consolidate with a 12-month loan at 28%: $900 repaid in equal monthly payments is about $86.86 a month, or about $142 in interest over the year. Add an application fee of up to $20 if it’s a PAL.

Those figures assume the $15 fee never changes, renewals every 14 days, and a loan at the 28% maximum with 12 monthly payments. They’re arithmetic for comparison, not an offer from any lender. Your state may also limit how many times a loan can be renewed; check your state’s page.

The math stops working in two situations. If the new loan’s monthly payment is more than you can actually pay, you’ll miss payments and end up worse off. And if you consolidate and then take a new payday loan, you now have both. Run your own loans through the calculator before you sign anything.

“Payday relief” companies

These companies advertise that they’ll consolidate, settle or “get you out of” payday loans. Often they tell you to stop paying your lenders and send your money to them instead. They’re not making you a loan. They’re selling a service, and many want fees before they’ve done anything.

The advance-fee ban

The FTC’s Telemarketing Sales Rule, 16 CFR 310.4(a)(5), says a company selling debt relief by phone can’t ask for or take any fee until all three of these have happened:

1. At least one of your debts has been settled, reduced or otherwise changed under an agreement you signed.
2. You’ve made at least one payment under that agreement.
3. The fee is proportional to the debt resolved, or is a fixed percentage of what you saved.

The FTC describes the rule as stopping for-profit companies that sell these services over the telephone from charging before they settle or reduce a debt. Its consumer advice puts it more bluntly: “Only scammers will try to collect fees from you before they settle any of your debts.”

What happened with Payday Support Center

In 2016, the FTC banned the operators of “Payday Support Center” and “Infinity Client Solutions” from the debt relief business. They had falsely promised to resolve people’s payday loans through a hardship program. People stopped paying their lenders and got no relief. The judgments topped $23.7 million, partly suspended.

The pattern repeats: you stop paying the lender on someone’s advice, fees and collection pressure build, and the company that told you to do it has your money.

How to check a company before you pay

Use the FTC’s warning signs. Walk away if a company:

• wants money before it has settled or changed any debt
• guarantees results
• signs you up without looking at your budget
• says it’s a “government” program
• tells you to stop talking to your lenders

Then:

• Look the company up with your state attorney general and local consumer protection office, as the FTC suggests.
• Ask, in writing, for every fee and when each is charged.
• If it calls itself a nonprofit counselor, check whether it’s a member of the NFCC or the FCAA. The FTC also notes that nonprofit status doesn’t guarantee services are free or affordable.

A legitimate nonprofit credit counselor is a different thing from a payday relief company. Counseling sessions are where you get a budget and options; see nonprofit credit counseling.

If consolidation isn’t possible

If you can’t qualify for a cheaper loan, you still have moves. Ask the lender for an extended payment plan, which some states require; see extended payment plans. Take back control of your bank account with a stop payment. Or ask us to connect you with nonprofit counseling through the help form.

The whole sequence is in how to get out of payday loans.