By Ben LuthiAre Payday Loans Secured or Unsecured?
By Ben Luthi
Payday loans are unsecured debt, which means you don't have to put up any collateral to borrow the money. While that makes them easy to access, they come with significant risks that are worth understanding before you apply. Here's what you need to know.
Are Payday Loans Secured or Unsecured?
A payday loan is unsecured debt. Unsecured debt is any loan that doesn't require the borrower to pledge an asset, like a car or home, as collateral. If you fail to repay an unsecured loan, the lender can't automatically seize your property the way they could with a secured loan.
Payday loans fit this definition because lenders approve them based on your income and a postdated check or bank account access, not based on assets you own.
With a secured loan, such as an auto loan or mortgage, the lender has the right to repossess your vehicle or foreclose on your home if you stop making payments.
Learn more: Secured vs. Unsecured Personal Loans: What's the Difference?
Should I Get a Payday Loan?
Even though payday loans are easy to qualify for, that accessibility comes at a steep price. Here are some of the biggest risks to consider:
- Extremely high costs: Payday loan fees typically range from $10 to $30 for every $100 you borrow, which might sound manageable until you factor in the repayment term. On a standard 14-day loan ranging from $100 to $500, that translates to an APR of roughly 261% to 782%.
- Debt trap risk: Because the full balance is due so quickly, many borrowers can't repay on time and roll the loan over, paying another round of fees just to extend it. The Consumer Financial Protection Bureau (CFPB) found that more than 80% of payday loans are rolled over or renewed within 14 days.
- No credit-building benefit: Most payday lenders don't report on-time payments to the credit bureaus, so paying back your loan won't help your credit score. However, if your account goes to collections, it can show up on your report and hurt your score.
- Risk of bank account overdrafts: Payday lenders often require access to your bank account. If funds aren't available on the due date, you could face overdraft fees on top of what you already owe.
Given these risks, it's worth exploring alternatives before turning to a payday loan.
Learn more: Why Are Payday Loans Bad?
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Alternatives to Payday Loans
If you need cash quickly, there are safer options worth considering. Here are a handful you can compare:
- Emergency savings: Tapping your own savings, even a small emergency fund, is the lowest-cost option. If you don't have one yet, starting with even $500 can protect you from needing high-cost loans in the future.
- Credit union payday alternative loans: Federal credit unions offer payday alternative loans (PALs) as a more affordable alternative to payday loans, with borrowing amounts ranging from $200 to $2,000 and repayment terms of one to 12 months. APRs are capped at 28%, making them significantly cheaper than payday loans. The main drawback is that you must be a credit union member to qualify, and not all credit unions offer them.
- Personal loans: Banks, credit unions and online lenders offer personal loans with much lower interest rates than payday loans. Even borrowers with fair credit may qualify for rates significantly below the common 400% APR on payday loans. With Experian, you can get matched with personal loan offers based on your credit profile.
- Credit cards: If you have a credit card, using it for an emergency expense or taking a cash advance is typically far cheaper than a payday loan, even with a cash advance fee.
- Paycheck advance apps: Paycheck advance apps like Earnin, Dave and Brigit let you access a portion of your earned wages before payday, often with no interest. Fees vary, though, and APRs can be high, so review the terms carefully.
- Negotiate with creditors: If you need a payday loan to cover a bill, it may be worth calling the creditor directly. Many utility companies, medical providers and landlords offer hardship plans or payment extensions.
Learn more: Alternatives to Payday Loans
Frequently Asked Questions
Think Twice Before You Borrow
Payday loans are unsecured, easy to get and fast, but those conveniences come with serious drawbacks. Triple-digit APRs and short repayment windows make them one of the most expensive ways to borrow money.
Before taking out a payday loan, explore every alternative available to you. And if you're working to build financial stability, monitoring your credit with a free Experian account is a good place to start.
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About the author
Ben Luthi
Ben Luthi has worked in financial planning, banking and auto finance, and writes about all aspects of money. His work has appeared in Time, Success, USA Today, Credit Karma, NerdWallet, Wirecutter and more.
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