Is a Payday Loan Secured or Unsecured? Know the Differences

Payday loans are dangerously easy to get. You only need a bank account, proof of income and a photo ID to be eligible. But payday loan borrowers are often confused about the type of loan they are getting and whether it’s a secured or unsecured loan.

Key points

  • Payday loans are considered unsecured loans because collateral is not required
  • Despite this, payday loans can often feel like secured loans because technically your next paycheck is the collateral
  • You should not have to provide anything other than a postdated check or bank account information to qualify for a payday loan
  • Payday lenders have no asset to seize if a borrower defaults on a payday loan
  • This leaves debt collection efforts, lawsuits and wage garnishment as their only real options to get paid if you default

Stuck in payday debt?

DebtHammer may be able to help.

Payday loans are unsecured debt

A payday loan is classified as unsecured debt, so it’s a fast way to come up with some quick money — you don’t even have to leave home, and you can qualify even if you have a bad credit score — and there’s no need to risk anything valuable as collateral. 

Sounds ideal, right? However, payday loans are actually very dangerous.

Though it’s an unsecured debt, a payday loan can feel like a secured debt because the collateral is your next paycheck. You generally will be required to pay off your payday loan within a couple of weeks — or by your next payday — which can be pretty tough. 

The high interest rates and unrealistic repayment schedules leave borrowers trapped in a cycle of debt.  More than 90% of Americans end up regretting their original payday loan.

READ MORE: Pros and cons of payday loans

What is the difference between a secured and unsecured loan? 

Let’s start with the basics:

  • Secured loans are protected by an asset, usually some form of collateral, in case you fail to make the payments. For example, car loans and mortgages are secured loans. Your car or home is the collateral if you default on your loan, and if you fail to make your payments, you could lose your collateral.
  • Unsecured loans are made without any form of collateral. Essentially, all that’s required is a promise to repay the money. While that might sound ideal for the borrower, this comes with its own disadvantage — you’ll pay higher costs to borrow.

Advantages of secured loans

A secured loan offers some advantages, including:

  • Lower interest rates
  • You can often qualify for a larger amount of money
  • Since you’re putting up collateral, you have a higher chance of approval

You can qualify for secured loans by using a secured credit card, a cash deposit, or even investment accounts as collateral. For eligibility, secured loans usually require good credit, relatively consistent monthly payments and lower interest rates. However, there is an element of risk for the borrower because collateral is involved. 

Secured loans are usually used for large purchases like homes, vehicles, and real estate.

Advantages of unsecured loans

Unsecured loans are typically used when a borrower needs quick cash for emergency car or home repairs or unexpected medical costs.

An unsecured loan also has a few benefits:

  • They’re less risky for the borrower because there’s no collateral
  • The lender places fewer restrictions on the money you borrow
  • Your credit score usually isn’t as important (or, in the case of payday loans, won’t matter at all)
  • The process is faster and can even be done mostly online, utilizing the convenience of online lenders

Unsecured loans will almost always have higher interest rates than secured loans.

READ MORE: In over your head with payday loans? Learn how to escape the debt trap

Secured vs. unsecured loan: Which is better?

The type of loan that will work best for you will depend on your financial situation. 

When a secured loan may be betterWhen unsecured loans may be better
You need a longer repayment termYou need money fast
You have collateralYou don’t have property to use as collateral
You need to borrow a significant amount of moneyYou need to borrow a small amount of money
You know you can make the paymentsYou aren’t sure you can make the payments as scheduled
You don’t mind placing your assets at riskYou don’t want to risk losing your assets

How payday loans work            

A payday loan — also sometimes called a cash advance loan — is usually short-term, has few requirements, and doesn’t require a credit check. The loan amounts are usually small. Payday loans can seem like an ideal way to borrow some quick cash to pay your rent on time to avoid triggering late fees or pay emergency bills, such as a home air-conditioner repair in the middle of summer or to pay an insurance deductible on your car after an accident. That’s really the only benefit of a payday loan.

No collateral is required

Though you have to provide bank account information or a postdated check when you get a payday loan, these are not considered collateral because a lender can’t seize them if you default. The only way a payday lender could force you to repay is to take you to court and request wage garnishment. 

With secured loans, once you miss a certain number of payments, the lender will take your asset, usually through repossession or foreclosure. No lawsuit is required. 

Pro tip: Some borrowers erroneously believe that payday loans are secured because lenders require access to yoru bank account or a postdated check. However, borrowers can rescind that access or stop payment on the postdated check as soon as the loan funds are deposited.

READ MORE: What you need to know about payday loan interest rates

Look for better alternatives

Before taking out any loan, establish a clear repayment plan.

If you’re certain you won’t be able to meet the payday loan repayment deadline, don’t take out a payday loan. Go to a credit union and apply for a Payday Alternative Loan instead, or take a few hours to research your other options, like cash advance apps.

Payday lenders count on borrowers being unable to pay back the first loan. Then the borrower will have to take out another loan with another set of high fees. This leaves borrowers caught in a debt trap that’s difficult to escape.

READ MORE: Practical payday loan alternatives

The bottom line

A payday loan is an unsecured debt, but the loans can quickly make you feel like you’re using your own wages as collateral. Payday loans should only be considered as a last resort and only if you’re completely certain you can pay the loan off when scheduled. Don’t even consider turning to a payday lender until you’ve explored other financial services and exhausted all of your other options.


Installment loans vs. payday loans: Which is better?

Installment loans will always be a better option than payday loans because the interest rates will be lower, the repayment terms are more flexible and the money is provided in a lump sum. Because you can choose the term when you take out the loan, you have more control over how much your monthly payment will be. Payday loans are small loans, but you’ll be expected to repay the entire balance on the due date, which will be your next payday.

Will I qualify for loans if I have bad credit?

It’s possible. There are various loans for borrowers with bad credit, and peer-to-peer lenders have more flexible credit history requirements. However, if you expect to need an unsecured loan in the near future, take some steps to review your credit reports with all three credit bureaus — Experian, Equifax and TransUnion — and make sure no errors are dragging down your credit score. The better your credit score, the lower APRs you’ll have to pay.

What is an origination fee?

An origination fee is a percentage of your loan amount that a lender charges for the processing of your loan. Not all loans will have an origination fee, so be sure to ask before you complete an application for any unsecured loan.

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