The next time you run out of cash to give your car a quick fix or mend a part of your roof, you can always run to a payday lender to secure a short-term loan. Your credit history doesn’t have to be fantastic, nor do you need to have collateral to give to clear your payday loan debt.
To avoid the rigor in the application process of personal loans obtained from your regular banks, payday loans were created as a short-term alternative, especially when you desire to meet pressing needs before your next paycheck.
Most payday lenders do not require you to do much more than have a steady income. Some even accept unemployment benefits as an alternative to regular income as an alternative to providing you with an instant payday loan. In addition, it is usually paid all at once with your next paycheck.
This doesn’t require collateral of any kind, therefore, it is termed as an “unsecured loan.” A vivid distinction is made between secured and unsecured debt—the need for collateral.
Pros and Cons of Secured Loan
Secured loans require collateral, which is essentially financial assets. These assets could be in the form of land properties or vehicles. Sometimes, bonds, stocks, and shares could be acceptable collateral. Lenders need collateral to minimize their risks.
Aside from requiring collateral, due diligence is often done to verify credit history and your ability to pay back this type of loan before it is given to you. When given, a secured loan could be for the long term, yielding lower interest rates and affording you access to a larger cash advance than what an unsecured loan could give you.
Examples of sacred loans are mortgage loans, car title loans, pawn shop loans, home equity lines of credit, etc. Furthermore, the security collateral offered to lenders by the loan agreement, the possession, and sometimes title, is held by the lender until the borrower pays what is owed in full.
Advantages of Secured Loans
- One of the most important advantages of a secured loan is that you have access to a large amount of money over a long period of time. This is essential because security is almost equivalent to the loan’s value, which the lender can take away if you default.
- By nature, secured loans attract lower interest rates than what unsecured loans may offer you.
- Ideal for long-term projects and profitable investment, and payment isn’t necessarily a fixed monthly payment arrangement.
- When you are dedicated to your payments, secured loans could be a way to greatly improve your credit score. It will help you build your credibility and make your credit history good enough for future loan applications.
Disadvantages of Secured Loans
- Secured loans could destroy your credit history as fast as you build it.
- You may lose your collateral if you default or do not clear your payback loan sum. Consider taking out a secured loan if you need a large sum of money over a long period of time. You have a certain means of paying back to avoid losing your collateral.
Pros and Cons of Unsecured Loan
You do not need to put up anything as collateral when seeking unsecured loans. They are loans particularly designed for short-term purposes. Lenders may find these loans risky, but borrowers find them more convenient as they are easy to access and the criteria are less strict.
Since it is risky, in the sense that no collateral is advanced, lenders often offset the risk by imposing a higher interest rate and a shorter payment cycle. However, since there is no collateral to lose on the borrower’s part in the case of default, you could be sued in a civil court and have your checking account garnished.
Examples of unsecured loans are payday loans, credit cards, and personal lines of credit. In all of these examples, there are fixed monthly payment arrangements with lenders, and they do not require any form of collateral.
Also, getting unsecured loans is quite fast as lenders of these loans rarely consider credit history as the only ground for non-approval.
Advantages of Unsecured Loans
- It is fast and easy to secure, as it requires no collateral or tedious credit evaluation.
- Unlike secured loans, lenders place fewer restrictions on the amount of money you borrow, and default payments don’t instantly reflect on your credit score.
- There are no assets at risk, and, in most cases, borrowers can transfer their debt to debt relief companies to help them create a payment plan.
Disadvantages of Unsecured Loans
- Lenders often place higher interest rates on the loan sum to mitigate their risk, accumulating debt greater than the sum borrowed.
- Unsecured loans are repayable within a short time.
- In most cases, lenders often consider your credit score when granting your application for an unsecured loan, especially for payday loans.
Secured and Unsecured Loan: Final Verdict
Deciding to choose between secured and unsecured loan could be tricky. Nevertheless, the choice solely depends on the purpose of seeking the loan in the first instance.
If you’re looking to do something quite capital intensive requiring you to take up a loan that would allow you to spread repayment over a long period, then secured loans seem to be your best bet.
Unlike unsecured loans, the application process may not be simple and easy, you may not find online lenders quick enough to grant you quick loans, and you may need collateral. Stil;, the secured loan would help you adequately take care of your capital-intensive projects in the long run.
However, if you want to get a short-term loan to meet pressing needs, considering getting unsecured loans, such as payday loans, could be a wise choice. Credible payday lenders, like MoneyZap, have built a payday loan structure that affords anyone access to quick personal loans regardless of bad credit or no collateral.
With MoneyZap, you can get up to $10,000 in payday loans. All applications are online and as stressless as you never thought money could be. Also, interest rates are kept at reasonable percentages, so it won’t complicate your payday loan repayment plan.
Frequently Asked Questions
How Do I Know if My Loan is Secured or Unsecured?
The demand for collateral principally distinguishes secured and unsecured loans. Once your lender requests that you present any security before your application can be granted, the loan becomes a secured loan.
Interest rates and the period of repayment are also distinguishing factors. For instance, unsecured personal loans attract higher interest rates and are typically short-term in scope.
Are Payday Loans Variable or Fixed?
Payday loan payment structures are largely dependent on your lender. Typically, a payday loan is an unsecured debt that is capable of being paid off in one lump sum payment.
However, they often attract fixed flat interest rates that vary among lenders. Trusting a payday loan connecting service like MoneyZap helps you get the best payday lending rates most suitable for your pressing needs.
Is a Payday Loan Installment Loans or Revolving Credit?
For installment loans, you receive the loan as a lump sum and then pay it back over a predetermined period with interest. Payday loans conveniently fall under this category as they are installment personal loans. Also, your account automatically closes as soon as you repay the loan sum for installment loans.
On the other hand, revolving credit allows you to borrow more than your credit line. You may keep reborrowing without having to reapply or reopen your account. Furthermore, the repayment plan is not fixed, although your lender may require a fixed minimum repayment. An example of revolving credit is a credit card.
Do I Need Assets For a Payday Loan
You don’t need collateral or assets as security for payday loans. All you need is a verifiable income source that can prove you are capable of making the fixed monthly payments or whatever other arrangements you have with your lender.
Assets are the only way lenders secure the loan sum when borrowers default. On the other hand, for payday loans, high interest rate, penalty fees, and court summons are examples of how lenders could recoup their money back from you. It is important to avoid this as they could have a negative effect on your credit score in the long run.