Payday loan consolidation involves paying off debts owed to several payday lenders with a new loan. Individuals with an adverse credit history are likely to find that the cheapest way to consolidate debt is through a Home Equity Line of Credit (HELOC). This is a flexible credit line that can be used whenever the need arises.
Advantages of Payday Loan Consolidation
- Interest rate. Whilst the rate of interest on payday loans is well in excess of 400%, HELOC loans are available at an interest rate of 8 to 9%. More interest is paid in one month than in three years.
- Term. An extended term allows a homeowner to spread the cost of borrowing over the duration of the mortgage. This will help to reduce monthly repayments and free-up disposable income.
- Flexibility. It is possible to borrow money from the arrangement and as and when the need arises.
- Collection agencies. Paying-off creditors means that further action from debt collection agencies will now cease. This can help to alleviate stress and anxiety.
- Tax deductible. Homeowners may be able to deduct any interest paid from end of year taxes.
Disadvantages of Payday Loan Consolidation
- Collateral. It is a low interest consolidation loan suitable for all borrowers, regardless of credit history, because it is secured on a property. This means that, in the event of the borrower defaulting, foreclosure is a possibility.
- Equity. Loans are only granted when sufficient equity is available. Whilst this doesn't present a problem in a rising market, it can be an issue when property prices are falling. Home equity is needed to protect the lenders legitimate financial interests.
- Poor credit. It is more difficult to get a bad debt consolidation loan, particularly for those who don't own their own home. The rate of interest will also be higher. However, tenants may still be eligible for an unsecured Prosper loan, albeit at a higher rate of interest than a HELOC.
- Additional borrowing. There is a strong temptation to borrow more money than is needed. This could exacerbate financial difficulties for those who aren't good at controlling their finances.
Payday loan consolidation can substantially improve affordability due to the reduced rate of interest. However, it does involve turning unsecured into secured debt. There are other ways to deal with financial difficulties, such as a debt settlement program.
Disclaimer: This article in no way attempts to give legal or tax advice. One should consult a licensed attorney, tax advisor, or other qualified professional before proceeding.
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