Suppose there is a sudden medical emergency at home. The treatment expenses are too much. You don’t have that much money at the moment. What do you think you would do? Simple. You would try to borrow money.
People need credit facilities when they need a large sum of money at short notice. It may be for education, marriage, medical emergencies, etc.
There are numerous credit facilities that a person can avail of. You might consider taking out a personal loan if you want to borrow money without providing any security. You might take a house finance loan when you have a mortgage. The list goes on.
A payday loan is one of the most popular things among credit seekers. You can learn more about payday loans if you continue reading.
Payday Loan: Secured or Unsecured Loan?
Payday loans are short-term credit facilities. This means borrowers need to repay the loan in a short time. They charge a very high interest rate. The name ‘payday loans’ comes from the fact that the borrower has to repay the borrowed amount as soon as they receive their next salary. The repayment period is between 2 weeks to 4 weeks.
Since the credit is offered for such a short period of time, it is unsecured. So there is no need for collateral.
For example, when a person gets a mortgage, they need to offer a piece of property as collateral. But for payday loans, borrowers just need to write a postdated check to the loaner to receive the required amount. The date on the check is usually the date when the borrower receives their next salary.
Secured vs. Unsecured Loans
So far, the terms secured and unsecured loans have been used repeatedly. What exactly are these? A secured loan requires the borrower to pledge an asset. The credit is approved when the creditor receives an asset to meet the financial risk.
An unsecured loan requires the borrower not to have to pledge anything. They receive the credit without submitting any asset.
In this section, we take a look at secured and unsecured loans. A side-by-side comparison of both types would help people to understand these better. People will be able to make well-informed decisions.
Unsecured Loan Considered
An unsecured credit facility does not need any surety. The borrower gets the credit quite easily. They don’t have to promise any assets. So, these debts can also be claimed by everyone. Even people who don’t have a lot of assets.
The financial risk is high because there is no collateral. The creditor bears the risk. Therefore, the loan amounts are usually small. Borrowers can avail small sums, up to $500. You don’t need insurance for the loan. If people wish to borrow money, they will get it easily. The only thing that they need is a document to prove their identity.
What Is an Unsecured Loan?
Imagine this. You are in dire need of money. But you do not own any property. You also do not own any gold. You have not invested in mutual funds or fixed deposits. So, you have no hope of getting a credit facility. But you manage to find a lender who offers you credit without collateralizing any of these items. These debts are considered unsecured loans.
The financial risk of such a credit facility is completely borne by the lender. The rate of interest on them is higher. The government frequently regulates the rates. But it is not strict enough. The borrowable amount is meager. This is clearly evident when it is compared to secured loans.
But unsecured loans are processed and approved very quickly. Then, when you need money for an emergency, unsecured loans are a good option. You don’t have to wait for your credit facility to be processed when you have a loved one in the hospital waiting for surgery.
When to Choose An Unsecured Loan?
An unsecured debt might not look like the best deal out there. The interest rates are through the roof. The credit amount is meagre. The repayment terms are rigid. You need to pay back in the least possible time. Who would anyone still pick unsecured loans?
But it is true that desperate times call for desperate measures. Sometimes, you need the money so badly that everything else seems unimportant. Here are the times when you should choose an unsecured debt:
- When you don’t have the time to wait for your loan to be approved.
- When you don’t have assets that you can offer as collateral.
- When you have a steady source of income to repay the high interest rates.
Secured Loan Considered
A secured loan is a credit facility that requires the borrower to present collateral to secure the amount. Since the borrower is already offering the collateral, the financial risk involved for the lender is almost negligible. So, the amounts are flexible and depend on how much you can offer as collateral.
You have to pledge something in return before you can receive a secured loan. You need to present proper identification papers and other related documents.
What Is a Secured Loan?
Suppose you require a large sum of money. This money has to be used for a long period of time, say ten years. The financial risk involved is huge. So, you are ready to collateralize any of your assets – be it property or mutual funds.
This is a secured loan. It is given by a registered financial institution. You need to offer an asset to claim the amount. You also need to present the proper documents and complete the paperwork.
You can repay the borrowed amount back in your own sweet time. The repayment tenure is flexible, and thus, you can adjust it according to your needs. The interest rate is low, and the borrowed amount is very high.
When to Choose a Secured Loan?
A secured loan might seem like too much work. You have to keep waiting for it to be approved. You need to offer an asset to secure the amount. So, why should anyone choose a secured loan?
These are some of the situations when one might consider getting a secured loan:
- When you need to borrow a huge sum of money.
- When you need the money for a long period of time.
- When you cannot afford to pay a large amount as the interest on the loan.
- When you have an asset to collateralize.
Pros and Cons of Unsecured Payday Loan
It would be wrong to say that unsecured payday loans only have advantages or disadvantages. Here is a side-by-side analysis of the pros and the cons:
The loan is processed quickly
The interest rates are far too high compared to the amount borrowed.
You are not expected to give collateral in exchange for the loan.
You need to repay the amount within a few months.
The paperwork is simple
The loan amount is tiny
It does not affect the credit score of the borrower
There are many fraudulent lenders
Requirements for Getting Unsecured Payday Loan
Unsecured loans are a boon for people who don’t own numerous assets. Since there is no need to provide collateral, anyone can receive them. This is the reason that unsecured loans are so popular nowadays.
You might have heard that unsecured payday loans are in high demand. Does that mean that it is super easy to get the loan? Each lender has different conditions for approving an unsecured payday loan.
But here are the most common requirements:
- The borrower should be at least 18 years old.
- The borrower should be a citizen of the country.
- The borrower should have a current bank account.
These are the requirements that are unchangeable, irrespective of the lender. But lenders might have different opinions on the following requirements:
- They might want the borrower to have a steady source of income.
A lot of lenders do not look into the sources of income of the borrower.
- The borrower should present all required documents for approval.
Most lenders don’t care about government-issued documents. Some of them only need proper identification documents.
It is to identify that the borrower is a citizen of the country. This step is a necessity to ensure that the money is not used for any illegal purposes.
A payday loan is an unsecured credit that borrowers need to repay when their next payday arrives. These are loans that are given for a very short time, and lenders charge a very high interest rate.
Borrowers do not need to present any assets for these loans. There is no collateral or guarantor in exchange for the borrowed amount. The borrower might be unable to repay the amount. In that situation, the loaner would be at a loss.
Payday loans come with a very high dividend rate. But they are still very popular. The reason is simple. Registered financial institutions do not keep track of these debts. This means they do not affect your credit score.
All in all, it is a great remedy for people who don’t have a lot of assets. Numerous people can avail of these loans because they are unsecured. Most payday creditors don’t even look into the income details of the borrower.
Sources Used in Research for the Article:
- Personal Loans: Secured vs. Unsecured, National Credit Union Administration,
- Understanding Your Credit, Federal Trade Commission,
- Payday loans key terms, Consumer Financial Protection Bureau, https://www.consumerfinance.gov/consumer-tools/payday-loans/answers/key-terms/#annual-percentage-rate-apr