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Consider Your Options When Comparing Secured & Unsecured Loans
Here’s Why A Direct Lender Loan Has Different Rates And Terms When Compared To A Secured Loan
There are two types of direct payday loans – secured or unsecured. The former requires collateral from the borrower. The latter solely depends on the borrower’s credit-worthiness and banking history. A big difference between the two is what happens if there is a default on the loan. Let’s discuss the differences between a secured and an unsecured payday loan. After the evaluation you should be able to decide which works best for you.
What’s a Secured Loan?
A secured loan is a loan backed by an asset like a vehicle pink slip or your house. It can also be from items you pawn or put up as collateral. Examples include electronics, jewelry, or anything of financial value. This item will act as collateral for the installment loan. It gives the lender the right to repossess the collateral if you fail to repay the loan. Lenders will sell the repossessed property to pay off the loan, but if the proceeds from the sale are not enough to cover the loan completely, you will still be responsible for paying the difference.
Examples of a Secured Loan:
- Car title loan
- Home mortgage
- Loans by pawn shops
- Home Equity Credit
Qualifying for this type of direct lender loan can be a challenge
Foreclosing a house or repossessing a vehicle can be time-consuming and also one can never be certain of the condition of the collateral. This is why lenders will be certain of the credit history and income of the borrower before a secured loan is issued. The direct lender payday loan limit can be higher in some cases as well. Collateral for a secured personal loan is typically a high-value item. Think about a car or house, borrowers can get a larger sum of money. You may also see the monthly repayment schedule can be longer. A direct secured loan tends to have a longer repayment schedule. It’s difficult to track down what type of payment structure works. You can find many different articles and research studies that detail benefits of early payoff and how much it saves you. We recommend a recent study by the Office of Financial Research.
This data shows a huge benefit when it comes to the amount of money you save by working with a company who allows a loan prepayment. Typically a car loan lasts for 5 years, and we all know the popular 30-year mortgage home loan. Do you know the Pros & Cons of a Secured Direct Loan?
- Long repayment schedule
- Low interest rate
- Improves credit score when payments are consistent and on-time
- Borrowers can lose the collateral (car or home) on failure to pay back the loan
- Credit score will be negatively affected on failure to pay back the loan
An unsecured loan, on the other hand, does not require the borrower to mortgage their assets. Payday loans, personal loans and cash advances are examples of unsecured loans. In this case the direct lender cannot take any of your assets if you fail to pay back your loan. Typically, you must have a solid income and good credit history in order to qualify for an unsecured online loan. The amount you borrow may be smaller compared to a secured loan and the underwriter will verify bank and personal information. There is no collateral if you happen to default on monthly payments.
Examples of an Unsecured Direct Loan:
- Payday loan
- Payday advance
- Personal loan
- Cash advances
- Credit card
Here are some of the most common features of an unsecured direct payday loan. In most cases the amount you borrow will be a small amount. Except for student loans, unsecured payday loans are smaller in amount. Compare the rates and terms to secured loans while the interest rate charged on balances due is generally higher. Interest rates and the APR will be high for when you borrow from a direct payday loan lender. Typically the rate of interest on unsecured loans is higher. The interest rate on credit cards on average is 15 to 18%. With payday loans the rates can be over 100%. It’s best to compare the pros and cons of a direct payday loan to give you a better idea.
- They are easy to get and convenient. You can make payments and buy things when short on money
- Unsecured loans can improve credit score if paid each month on time. You can eventually qualify for secured loans with a lower interest rate
- With a higher interest rate, you are paying more for the goods and services compared to its actual price
- Credit score will be negatively affected if you miss payments on direct lender payday loans
Which is better when it comes to working with a direct lender? A loan which is secured by some type of collateral? Or an unsecured advance like a payday loan or credit card advance? Secured loans are typically more favorable for borrowers. In most cases, the borrowing limit is higher, interest rate lesser and repayment period shorter. It pays to do reseach on the companies you work with. Find out if your lender has a state license. Check out our direct loan state regulations page to find out what is required in your state of residence. Even online lenders find secured loans more favorable than unsecured loans. Most can repossess the collateral in the event of a non-payment. There is an assurance for the lender to get back the loan even if the borrower does not payback. Most states will allow an online company the chance to reposes a vehicle or take back an item that’s backed by collateral. In California for example, a car title loan lender can take possession of your vehicle if you miss a payment. The law gives the borrower a certain amount of time before the company can sell your car. But the clock will start ticking the moment that first payment is missed.