Payday loans are short-term loans that are generally unsecured. This means that the lender does not require the borrower to put up any collateral to secure the loan.
However, in some cases payday loans may be secured. For instance, if a borrower has a poor credit score, the lender may require them to provide collateral if they wish to be approved.
This guide will delve further into the nature of payday loans, explaining the different options available to borrowers.
What Exactly Is A Payday Loan?
A payday loan is a financial product typically used to cover emergency expenses. They tend to be taken out when an individual is unable to cover an urgent expense, such as an unexpected medical bill or car repair payment. The loan is usually repaid within 2 to 4 weeks, when the individual receives their next paycheck.
To qualify for a payday loan, applicants usually need to provide a form of ID, proof of employment and income, as well as their bank account details for the funds to be deposited into. The loan amount and interest rate is then confirmed by the payday lender, and the borrower should then read all the terms and conditions of their loan agreement before signing it.
Payday loans are sometimes referred to as cash advances as they are typically taken out against the borrower’s next paycheck. CFPB explains how “Depending on your state law, payday loans may be available through storefront payday lenders or online.”
Payday loans offer a convenient, short-term financial solution for individuals who need quick access to cash. However, they can be costly as the interest rates tend to be quite high so applicants should only borrow a payday loan if they really need it, and not for frivolous spending.
Are Payday Loans Unsecured?
Payday loans tend to be unsecured because the lender does not require the borrower to provide any type of collateral to secure the loan. Instead, the lender relies on the borrower’s ability to repay the loan from their upcoming paycheck or other form of income.
The lender may also require the borrower to provide proof of income, such as a pay slip or bank statement. This will help them analyze the applicants risk levels to determine if they will be likely to repay back the loan on time.
Can Payday Loans Be Secured?
In some cases, payday loans may be secured. If a borrower has bad credit, the lender may require them to provide collateral, such as a car or home, to secure the loan.
Some lenders are also willing to offer secured payday loans to those looking to borrow money without their credit score taken into consideration. So if for instance you were looking for a $500 cash advance with no credit check, then the lender may request collateral to approve this.
However, collateral means that if the borrower fails to repay the loan, the lender can take ownership of the possession tied to the contract. Failing to pay off the loan can have negative financial implications so it is important to only get a secured payday loan if you are certain you will be able to manage the repayments. Otherwise you could face the risk of losing your vehicle or property.
What Are The Alternatives To A Payday Loan?
Whilst payday loans offer an extremely useful lifeline in times of financial troubles, they can have high fees which can sometimes make it tricky for consumers to pay off within the expected timeframe. So, there are some alternatives to payday loans that can be considered.
Credit union loans is a good example of an alternative to payday loans. Credit unions are non-profit organizations that offer low-interest loans to their members. Fees tend to be quite low so this could be an affordable way to borrow money – you usually just need to have something in common with the members to be able to join.
You could also look into a low-interest credit card. Make sure that you read the terms and conditions of the contract if you go with this form of credit.
A short-term loan from a bank could be right for you, as they tend to have low interest rates and flexible repayment options. However, they can sometimes take some time to be approved and borrowers still may need to provide collateral in order to secure a short-term loan. So you could also consider asking your bank for an authorized overdraft.
Another option to get cash fast is borrowing money from family and friends. This would involve no interest or fees and could be arranged in a relaxed structure to make sure you repay them when you can. Alternatively, you could sell any unwanted items you have through a garage sale or via online platforms such as eBay to obtain a few extra dollars.
If a payday loan still sounds like the best option for you, then it can offer an efficient way to get the funds that you need today. Whether it is secured or unsecured, make sure that you will be able to afford the repayments and check the terms and conditions of your contract before going ahead with this type of loan.