Jun 15, 2012

Payday Loan Consolidation – A Genuine Debt Solution?

With an estimated annual business of close to 60 billion dollars, payday loans are an ever increasing and growing market in the US, and indeed worldwide. The last few years have seen huge economic uncertainty, and individuals and families have been put under enormous financial pressure. Payday loan companies have not only capitalized, but thrived as a direct result of these pressures and strains. In theory, a payday loan is an extremely convenient short term debt solution. In practice, however, those loans can quickly turn from a convenient debt solution to an overwhelming debt problem. The problem with these instant loans is that because the interest rate is so high, paying back the loan can leave the borrower stuck for funds before their next payday, and a vicious cycle of constant payday loans begins and a borrower will never be debt free again. An interest rate of 15% might sound reasonable, but 15% over two weeks is a massive 390% over the course of a year. You wouldn’t dream of taking out a car loan or a credit card at those rates, so why would you take out a payday loan at those rates?

What is a Payday Loan Consolidation Company?

When a customer falls into a loan cycle, they can often find themselves financially frozen by the prohibitively high interest rates associated with the debt. As is most common among payday loan borrowers, there are often several loans outstanding and the payday loan companies can be extremely forceful in pursuing their debt. A loan consolidation company effectively acts as a middle man between you and your creditors – those that you owe money to. They will approach your creditors on your behalf and attempt to negotiate a settlement figure and a structured payment plan so that you can pay off your debt in a timely manner. Consolidation companies generally instruct customers to stop paying their payday loans, and often to close the account that any payments are being made from. Instead of paying your loans directly, you make a payment to your loan consolidation company who in turn distribute funds in respect of your loans.

How Does a Loan Consolidation Company Make Money?

There are two ways how a payday loan consolidation company makes money. The first method involves taking the first month’s consolidated payment as the cost of using their services. For example, if you came to an agreement to repay $500 a month through the consolidation company, they would take your first payment of $500 and you would not start servicing your debt until the second month onwards. The second and more popular method involves an on-going charge which is included in your repayment plan. In this case, your $500 a month repayment might include a $75 monthly charge for the debt consolidation company.

Why do People Use Payday Loan Consolidation?

In most cases, people are driven to loan consolidation companies through sheer desperation. Payday loans feature cripplingly high interest rates and fees, and they can quickly become overwhelming. People seek the relief of a debt burden in an attempt to save money, and to reduce the number of outgoings to one single payment. Others use debt consolidation companies as they do not like dealing with their lenders and are happy to pay a fee for someone else to do their dealings on their behalf. Unfortunately, the most people use payday loan consolidation companies simply because they think it is the only solution available to them. Although this is far from true, there is a widespread misunderstanding as to the powers of payday loan companies, and what they can do to recover their supposed debt. These payday lenders tend to use intimidating and threatening language, but in many cases their threats carry no weight. Regardless, people do feel intimidated and threatened, and in turn seek the assistance of payday loan consolidation assistants.

Should I Use a Consolidation Assisting Company?

The problem with that type of companies is that you are paying out more money for someone to arrange to pay your debts, and in many cases these companies are simply interested in making money for themselves. The laws around payday loans have become increasingly strict in recent years, and there is a wealth of information available for people so that they can arrange to repay their debts on their own terms.

First and foremost, you should find out whether your payday loans were legal in the first place. If the lender is not licensed in your state, you are only obliged to repay the principal sum you borrowed. In several states, there are very strict rules on the amount of interest that these lenders can charge, and many are operating illegally. Furthermore, the lenders that are licensed will often have extended repayment options available if you contact them directly. At their heart, loan consolidation companies are businesses looking to make money, and their terms and conditions can be misleading also.

Many people could save themselves far more money by taking swift and direct action on their own. If you are in difficulty with payday loans, you should immediately close the account that these companies have access to. Then, research whether they are a licensed lender in the first place. If not, you should contact them and inform them that you have confirmed the loan they issued to you was illegal, and if you have already repaid more than the initial sum borrowed that you demand a confirmation that your debt with them is closed. For legal payday loans, you should contact the lender and agree to a more structured repayment schedule.

A payday loan consolidation company is not a legal entity, nor does it hold any greater authority than you as an individual. It can be difficult, but any agreements that they can come to with a payday loan lender can be achieved by you without their help. There is no doubt that some people have used loan consolidation companies successfully, but there are just as many who have simply ended up further out of pocket. Before you go down that road, you should ensure that you have done everything in your power to resolve the issue yourself.

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