Are Payday Loans Secured?
Payday loans are short-term money loans meant to help people with urgent financial needs to get the cash they need ahead of their next paycheck. They are typically easier to get compared to traditional bank loans.
Payday loans tend to be easier to get since payday lenders don’t need to do a hard credit check with credit bureaus before approving your loan application. However, most people wonder if they need to use an asset as collateral to get this type of loan. That is; “is a payday loan secured or unsecured?. It is important to understand the difference between payday loans and other personal loan options that can be used for emergency purposes such as secured loans.
Why Are Payday Loans Unsecured?
Payday loans are a type of unsecured personal loan. This means you do not need to use any of your assets as collateral to get this type of loan. For payday loans, your chances of getting a loan do not depend on your credit score or the asset you use.
Instead, the payday lender only needs you to show proof that you earn enough monthly income to repay the loan at the agreed time. This often involves submitting your pay stubs or account statement to the lender.
Once this condition is satisfied, you can apply for and get a payday loan approved instantly without securing it with an asset and with no credit checks.
Typically, as part of the loan agreement, the lender will ask for your permission to withdraw the loan amounts electronically from your bank account, prepaid credit account, or credit union on the due date. You can also issue a post-dated check to the lender which will be used to repay the loan when it is due.
Which Loans Are Secured Or Unsecured?
Secured loans are short-term personal loans that require you to offer a valuable asset as collateral for the loan. Pawnshop loans and car loans are common examples of these types of loans. For a secured loan, how much money you can get often depends on the estimated value of the asset being used as collateral. Unsecured loans such as payday loans allow you to borrow money directly with no collateral.
Are Payday Loans Fixed Or Variable?
Payday loans are fixed interest loans. What this means is that the interest rate to be paid on the loan principal is determined at the beginning of the month and the lender cannot increase or decrease it during the loan duration. For variable interest loans, the lending company can increase or reduce the interest rate during the repayment term. Since payday loans are repaid within a short period (typically 15 to 30 days), the interest rate cannot be increased one the loan agreement has been signed. It would be predatory lending if the payday lender increases the interest rate after they lend money to you.
Is A Payday Loan Installment Loans Or Revolving Credit?
No. Payday loans are short-term cash loans, which means they’re not installment loans or revolving credit. Providers of installment loans such as mortgage loans allow borrowers to pay back the loan amount and accrued interest in fixed monthly payments instead of a lump sum payment. They also charge you an origination fee at the onset of the loan which is a sort of down payment for setting up the loan.
Revolving credit on the other hand is a credit line that permits you to withdraw the cash you need repeatedly within an agreed credit limit and payback in installments.
Payday lenders allow borrowers with a bad credit report get cash for settling emergency needs ahead of their next paycheck. They usually get a small amount, which is meant to be paid back when they receive their next paycheck and not on a long-term basis like installment loans or revolving credit.
What Happens If I Am Unable To Repay Payday Loan Debt to Payday Lenders?
One of the key differences between payday lending and secured loan options like car title loans is what happens if you’re unable to repay a payday loan debt. With a secured loan, you will most likely lose your asset if you’re unable to repay the loan. Since unsecured loans don’t need you to submit an asset, there’s no risk of losing anything due to a payday loan debt.
Payday lenders cannot arrest you or confiscate your personal property to repay a loan. However, you risk ending up in a bad debt trap since the money will continue to increase the longer you’re unable to pay.
Conclusion
Payday loans work differently from secured loans such as title loans or pawn shop loans. A Payday loan is a type of unsecured personal loan. Secured loans require collateral but unsecured loans don’t. Payday loan borrowers are not required to use any asset as collateral for the loan.Additionally, unlike banks, credit unions, and other traditional financial institutions, an online lender does not need to consider your credit score to qualify you for a loan. This makes this type of loan a great option for those with bad credit in need of emergency funding. You can apply directly on paycheck advance apps or through brokers like AdvanceSOS to get the money you need within a short time.
