Since payday loans don't require collateral for loan approval, they appear to have at least one advantage over pawnshops. However, payday lenders usually require a post-dated check or electronic access to your bank before approval. This fact may confuse whether a payday loan is secured or unsecured. This blog will clarify this uncertainty about unsecured payday loans and explain why it matters.
So, Is a Payday Loan Secured or Unsecured Debt?
A secured loan lender requires some form of collateral to guarantee your loan repayment. The collateral can be a house, car, jewelry, or other personal assets. However, the Consumer Financial Protection Bureau's Payday Lending rule prohibits payday lending from initiating payment transfers without the borrowers' consent. For this reason, post-dated checks and permission for electronic transfers don't qualify as collateral.
This condition makes payload loans unsecured. Secured payday loans do not exist.
Why Are Unsecured Payday Loans So Popular?
In a popularity contest of secured vs. unsecured loans, unsecured loans win. Over 22 million consumers have unsecured loans, a 9.1% increase from the first quarter of 2020. Many borrowers prefer this type of loan because of its flexibility, accessibility, and easy application process. Also, many consumers use payday loans to improve their credit. However, every loan type has its positives and negatives. Let’s look at the pros and cons of unsecured loans.
Pros of Unsecured Loans
- No personal property commitment: To qualify for an unsecured loan, you don't need to own valuable personal property. This feature allows more people to secure a loan. Equally important, you don't risk losing your car or wedding ring if you can't repay the loan for whatever reason.
- No use restrictions: You can use the money from your unsecured loan for many purposes, including emergency medical bills, home improvement, or vacation.
- Quicker and simpler application process: Since there is no collateral appraisal, the application process is faster and easier than secured loans.
- Bad credit fix: Except for payday loans, most unsecured loan lenders report your payment activity to the three major credit bureaus. For this reason, your sound, unsecured payment history can improve your credit score.
Cons of Unsecured Loans
- Possible credit damage: Your credit score will likely take a negative hit from missed payments or default. Although payday loan lenders typically don't report your debt activity to the three major credit bureaus, they could pass on your bad debt to a third-party debt collector who may report payday loan defaults to one of the major credit bureaus.
- Legal action: Unpaid unsecured loans can cause lawsuits and wage garnishments. This possibility could damage your financial well-being and creditworthiness.
- Higher costs: Unsecured loans are riskier to lenders because they do not include collateral as a guarantee of payment. For this reason, these loans usually have higher interest rates and stricter terms, especially payday loans.
An Alternative Unsecured Loan: Installment Loan
Payday loans are unsecured, but they are far from the safest option. The typical payback period ranges from two to four weeks. Consequently, these tight terms give you little room for error or budget mistiming. Although you can roll over your payday loan debt, it is very costly, with the potential of falling into a frustrating debt cycle.
Unsecured loans that stretch out your payments over time are much safer than payday loans. You can get this type of flexibility in an installment loan. Instead of paying one lump sum in a few weeks, you can pay in small installments over a period of several months to years.
A typical payday loan also requires you to pay the total amount owed plus the interest charge in one lump sum within two weeks. On the other hand, your installment loan payments gradually pay off the interest before settling the entire debt.
Choosing the Best Unsecured Loan
Emergencies happen often when we least expect them — and sometimes, we need to make a financial move that requires more than cash on hand. Unsecured loans can be an excellent solution for your immediate money needs. However, these loans have their pros and cons. The goal is to find the most agreeable and safe borrowing option available.
Jora installment loans give you the flexibility to pay back your loan over several months or years without extra fees. You can apply in minutes online and receive $500 to $4,000 as early as today.