About Short-Term Unsecured Credit Loans

Unsecured credit is not backed by any form collateral. For example, when you take out a home mortgage it is a secured loan, because your house is the collateral--the bank will seize that and whatever equity you have if you default. An unsecured loan has no such guarantee, so the terms (that is, the interest rate) are not as favorable.

Credit cards are usually not thought of as a form of loan, but they are exactly that. The main thing differentiating them from other forms of short-term, multi-payment, unsecured loans is that they are not necessarily short-term. A credit card represents an open line of credit; rather than borrowing a fixed amount, you borrow as much as you like up to a limit. This amount is repaid by installments, just as with any other multi-payment loan, except that the amount you pay back is based on the outstanding balance, which can change with purchases. Therefore, a credit card that is treated as if it were a short-term source of credit, and not a means of long-term borrowing and purchasing convenience, may also be viewed as a short-term loan. In fact, the wise use of credit cards is to always use them in this way.

Personal loans are an unsecured loan given by a bank, and they are usually based solely on the credit rating of the borrower. This makes getting one from a bank often more difficult, as there is no collateral and the risk to the bank is greater. Most banks are also in the credit card business, and a small, closed-end installment loan is not as profitable to them as the revolving credit of a credit card, and the interest rates on credit cards are generally higher than for a normal personal loan. However, for the consumer who has the time to shop for one and can get one, this is the best way to borrow money for substantial, one-time expenses.

Sometimes a borrower does not have the time to shop around in person at banks and try to strike a deal on a personal loan. The Internet has granted access to a financial product called the instant personal loan. Gaining access to this kind of credit is usually easy, since a credit check is rarely required. However, qualifications for approval often include regular employment and income. Once these two matters have been verified, the loan is given. Some lenders may require a phone conversation to clarify final issues before confirmation. Sometimes this can be done on the same day as the application, so while not quite "instant," it is quick. Interest rates on a legitimate personal loan of this type should be less than or equal to a credit card rate, which is appropriate since they are fundamentally the same form of credit.

A payday loan is an unsecured small loan, with repayment due in about 2 weeks. The interest rate varies with local law, but rates as high as 30 percent for a 2-week period are not unusual. Expressed as an annual percentage rate (APR), 30 percent for 2 weeks is almost 800 percent (contrasted against credit cards, which rarely exceed 25 percent APR). The borrower writes a postdated check to the lender in the amount of the loan plus fees and interest. Defaulting on the loan is a personal financial disaster, as it adds the fees for bouncing the check to any penalties for not repaying the loan on time. Payday loans are no longer restricted to storefront operations and are available online. This practice is illegal in Georgia, and it isn't feasible in 12 other states due to restrictive laws. A variation of the payday loan is the income tax refund loan. Credit reports are never a consideration for loans of this type, and given their disadvantages they are never sought by people with any alternatives.