Unsecured Short Term 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 rates) are not as favorable.

Personal loans are an unsecured loan given by a bank, and they are usually based solely on the credit rating of the borrower and count as short term because they can be structured for quick repayment. This makes getting one from a bank difficult, as there is no collateral and the risk to the bank is substantial. Most banks are also now 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. Also, the interest rates on credit cards are generally higher than for personal loans. 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.

Credit cards are also a form of unsecured loan paid in installments. They also count as short term because they can be quickly repaid, depending on the will of the borrower and the outstanding balance. The main thing differentiating them from other forms of short-term, multi-payment 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 treated as if it were a short-term source of credit and not a means of purchasing convenience can also be viewed as a short-term, multi-payment loan.

Sometimes a borrower simply does not have the time to do the leg work, shop around in person at banks, and try to strike a deal on a personal loan. The Internet grants access to a financial product called the Instant Personal Loan. Gaining access to this kind of credit is usually pretty 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 very 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. However, some forms of Instant personal loans are really just disguised payday loans.

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 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 borrower in the amount of the loan, plus fees. 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. Payday loans are no longer restricted to storefront operations and are now available online. This practice is illegal in Georgia, and it isn't feasible in 12 other states due to restrictive laws. A variant 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.