An unsecured loan is a loan approved and supported only on the basis of the borrower’s creditworthiness without the need for collateral. In this type of loan, a borrower does not pledge any property (such as a house or a car) as collateral for the loan which is a generic method of reinforcing security for a lender providing the loan. Unsecured loans expose lenders to unnecessary risks including other problems such as legal fees when pursuing defaulters. Therefore, they usually have higher interest rates.
A payday lender does not issue secure loans in a traditional sense. Their loans are not secured by tangible collateral as mortgages and car loans are.
However, they do make sure that repayment is secured by other means. In particular, payday lenders have borrowers give them a postdated check or agree to an automatic withdrawal from their checking accounts to repay the loan. They may also start calling, sending letters from lawyers and contacting the relatives or friends the borrower used as references when he took the loan. Lastly, legal action will be taken against a defaulter which may lead to penalties like wage garnishing (deduction of money from the defaulter’s salary as a result of a court order) or subsequent acquisition of personal property.
However, unsecured loans are more available than secured loans which add up to their lucrativeness.
Secured loans are less available since they aren’t sought after by many people. Most people don’t have the collateral to secure loans. The few that have collateral/assets usually don’t need loans.
A borrower’s credit history, which is usually a factor of verification while issuing unsecured loans, is not considered while processing an application for a payday loan. Unsecured loans are usually given to borrowers with a good credit history i.e. borrowers who have shown a good ability and consistency in repaying their loans in the past. However, payday loans are an exception because they are usually available to individuals with bad credit. One must, however, have a job or regular source of income to qualify.
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