Is a payday loan secured or unsecured?
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Is a payday loan secured or unsecured?

March 27, 2023
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Is a payday loan secured or unsecured?

Suppose a sudden medical emergency occurs at home. The costs of treatment are too high. At present, you do not have much money. What do you think you can do? It is simple. Try to get a loan.

People need a loan when they need a large sum of money in the short term. It may be for education, marriage, medical emergencies, etc.

There are many credit facilities that a person can use. One can consider a personal loan if one wants to borrow money without providing collateral. One can apply for a home loan if one has a mortgage. And the list goes on.

The payday loan is one of the most popular among credit applicants. To learn more about short-term loans, read on.

Short-term loans: secured or unsecured?

Short-term loans are short-term credit instruments. This means that borrowers must repay the loan within a short period of time. They have a very high interest rate. The name "payday loans" comes from the fact that the borrower must repay the borrowed amount as soon as he receives his next paycheck. The repayment period is between 2 and 4 weeks.

Because the loan is offered for such a short period, it is not guaranteed. Therefore, no guarantee is required.

For example, when a person obtains a loan, he or she must offer real estate as collateral. In the case of payday loans, the borrower simply has to write a postdated check to the lender to receive the requested amount. The date of the check is usually when the borrower receives his or her next paycheck.

Secured and unsecured loans

So far, the terms "secured loan" and "unsecured loan" have been used several times. What exactly are they? A secured loan requires the borrower to pledge an asset. The loan is approved when the lender receives an asset in exchange for the financial risk.

In the case of an unsecured loan, the borrower does not have to pledge anything. The borrower receives the loan without presenting any assets.

In this section we examine secured and unsecured loans. A comparison of these two types of loans will help to understand them better. People will be able to make informed decisions.

The unsecured loan considered

The unsecured loan requires no collateral. The borrower obtains credit quite easily. He does not need to pledge any assets. These loans can therefore be applied for by anyone. Even those who do not have many assets.

The financial risk is high because there is no collateral. It is the lender who takes the risk. For this reason, the loan amount is usually small. Borrowers can borrow small amounts, up to $500. No insurance is required for the loan. If people want to get a loan, they will get it easily. The only thing they need is a document to prove their identity.

What is an unsecured loan?

Imagine this. You have an urgent need for money. But you do not own any property. You do not even own any gold. You have no investments in mutual funds or fixed deposits. You therefore have no hope of obtaining credit. But you manage to find a lender who offers you credit without securing any of these items. These debts are considered unsecured loans.

The financial risk of this line of credit is borne entirely by the lender. The interest rate charged is higher. The government often regulates rates. But it is not strict enough. The amount that can be borrowed is low. This is clearly evident when compared with secured loans.

But unsecured loans are processed and approved very quickly. Therefore, when you need money for an emergency, unsecured loans are a good option. You do not have to wait for your line of credit to be processed when you have a loved one in the hospital waiting for an operation.

When to choose an unsecured loan?

Unsecured debt may not seem like the best deal at the time. The interest rates are very high. The loan amount is small. The repayment terms are strict. You have to repay the loan as soon as possible. Who would still choose unsecured loans?

But it is true that desperate situations call for desperate measures. Sometimes you need money so badly that everything else seems to be unimportant. Here are the cases when you should choose unsecured debt:

  • When you do not have time to wait for loan approval.
  • When you have no assets to use as collateral.
  • When you have a stable source of income to repay the high interest rates.

Guaranteed loan being evaluated

A secured loan is a line of credit that requires the borrower to provide collateral to secure the amount. Because the borrower already provides the collateral, the financial risk to the lender is almost negligible. The amounts are therefore flexible and depend on the amount that can be offered as collateral.

To qualify for a secured loan, it is necessary to offer something in return. Proper identification and other related documents must be presented.

What is a secured loan?

Suppose we need a large sum of money. This money is to be used over a long period of time, such as ten years. The financial risk is enormous. You are therefore willing to pledge one of your assets, whether it is real estate or a mutual fund.

This is a secured loan. It is granted by an authorized financial institution. To apply for the amount, you must pledge an asset. You must also submit the appropriate documents and complete the administrative formalities.

You can repay the borrowed amount at any time. The repayment period is flexible and can be tailored to your needs. The interest rate is low and the amount borrowed is very high.

When to choose a secured loan?

A guaranteed loan may seem too demanding. You have to wait for it to be approved. You have to offer an asset to guarantee the amount. So why choose a secured loan?

Here are some of the situations when you may consider getting a secured loan:

  • When you need a large loan amount.
  • When you need money for a long period of time.
  • When you cannot afford to pay high interest on the loan.
  • When you have an asset to put up as collateral.

Advantages and disadvantages of unsecured payday loans

It would be wrong to say that unsecured payday loans have only advantages or disadvantages. Here is a parallel analysis of the advantages and disadvantages:


  • The loan is processed quickly
  • No collateral is required in exchange for the loan.
  • Paperwork is simple
  • It does not affect the borrower's credit rating.


  • Interest rates are too high for the amount borrowed.
  • The amount must be repaid in a few months.
  • The loan amount is small
  • There are many fraudulent lenders

Requirements for an unsecured loan

Unsecured loans are a boon for people who do not have many assets. Since there is no need to provide collateral, anyone can benefit from them. That is why unsecured loans are so popular nowadays.

You may have heard that unsecured loans are in great demand. Does this mean that it is very easy to get this type of loan? Each lending institution has different conditions for approving an unsecured loan.

But here are the most common conditions:

  • The applicant must be at least 18 years old.
  • The applicant must be a citizen of the country.
  • The applicant must have a bank account.

These conditions are immutable, regardless of the lending institution. However, lending institutions may have different views on the following conditions:

  • They may require that the borrower have a regular source of income. Many lenders are not interested in the borrower's source of income.
  • The borrower must submit all documents required for loan approval; most lenders do not care about government-issued documents. Some lenders require only proper identification documents.

These documents attest that the borrower is a citizen of the country. This step is necessary to ensure that the money is not used for illegal purposes.


A payday loan is an unsecured loan that the borrower must repay on the next payday. These are short-term loans, and lenders charge a very high interest rate.

Borrowers do not have to show any assets for these loans. There is no collateral or guarantor for the amount borrowed. The borrower may not be able to repay the amount. In this case, the lender incurs a loss.

Short-term loans have a very high dividend rate. But they remain very popular. The reason is simple. Registered financial institutions do not keep track of these debts. This means that they do not affect the credit rating.

In short, they are an excellent remedy for people who do not have many assets. Many people can benefit from these loans because they are unsecured. Most creditors do not even examine the details of the borrower's income.

Quinanna Patterson
Written by
Quinanna Patterson
Loans, Mortgage, Insurance
I am a top-of-the-class accountant with an undergraduate and two professional certifications [BCom, CMA(US), CA (Intermediate)]. I have expert-level knowledge and understanding of subjects like accounting (financial and management), finance, investment, and economics.