An unsecured loan is money that is lent without any collateral as security. These loans are perceived to be high risk because the lender is not really sure that he will get back his money on time. This is the reason why the interest rates in these short-term unsecured loans are high and are available only to those who have good credit scores.
Unsecured loans are usually lent for short-term purposes like a medical exigency, home decoration, family events etc. Depending on the terms and conditions on the loan, the money has to be paid back by a specific period. In these financially stressful times, it can be difficult to get short-term loans because most people do not have a flattering credit history. Since banks do not entertain people with good credit, the financial market has been buoyant with different ways and means of short-term unsecured lending.
One of the most popular trends in short-term unsecured loans is payday loans. These are short-term loans that are given on the basis of the paycheck that you get every month. There is not much emphasis on the credit report; if you can prove to the lender that you can pay the money in time, you will get the money to your bank account in 48 hours. You may have to write a post-dated check amount for the amount repayable along with fees involved. Even if you have bad credit, you can quality for a payday loan. Bear in mind that payday loans carry very high interest rates. The interest rate for a payday loan in Louisiana is 16.75 percent, in Alabama, it is 17.5 percent while in Colorado, it is a whopping 20 percent for the initial $300 while the remaining amount attracts 7.5 percent interest rate. If you annualize these interest rates, you will find that you are paying more than 300 percent interest annually.
Cash advances from credit cards are also fast becoming a trend with people to cater to their short-term financial requirement. In this, you can borrow money from your credit card up to your credit limit in a manner as easily as just swiping your credit card in the ATM or using the black cash advance checks that come with your credit card statement. However, unlike the usual credit card purchases, there is no grace period involved. Cash advances are charged up to 25 percent annual interest rates apart from fees that range from 3 to 5 percent of the amount borrowed. Also, the interest kicks in right from the day you borrow the money,.
Banks have recognized the popularity of payday loans and are now out with their version of payday loans – direct deposit advances. Here, your bank gives you money equivalent of a part of your paycheck for a fee, and then deducts the money automatically from your next pay stub. Just like payday loans, direct deposit advances are a good way to get access to quick cash but even these carry a high interest component and fees. For instance, Wells Fargo charges $1.50 for every $ 20 borrowed. The average bank direct deposit advances come with an annual interest rate of 365 percent. It may happen that the person is not able to pay back the money before their next payday and has to take another direct deposit advance.
No matter what trends are there in short-term unsecured lending, the interest rates and fees may cause a debt crisis. The safer option is to ask your family and friends, who may lend your money without expecting interest when you give the amount back. But then, in most cases, we cannot expect the money to come back to us. The smarter thing would be to build a contingency or emergency fund that has sufficient funds to cover those unexpected events when you really need money.