Is a Payday Loan Secured or Unsecured? What That Means and How It Works
A payday loan is an unsecured loan, which means you don't have to put up collateral like a car or savings account to borrow the money.
Payday Loan Quick Facts
Typical fee: $10 to $30 per $100 borrowed.
Typical APR: 391% to 521% on a two-week loan, according to the Consumer Financial Protection Bureau (CFPB).
Repayment term: Two to four weeks, usually due on your next payday.
Collateral: None required.
Lender requirements: Active checking account, proof of income and a valid ID.
Loan size: Usually $500 or less, depending on your state.
Payday loans can help you stretch your money in an emergency situation by letting you borrow against future income. Here's what you need to know about how payday loans work and the differences between secured and unsecured loans.
MoneyLion offers a service to help you find personal loan offers. Based on the information you provide, you can get matched with offers for up to $100,000 from our top providers. You can compare rates, terms, and fees from different lenders and choose the best offer for you.
Key Takeaways
Is a payday loan secured or unsecured? It's unsecured: You don't pledge collateral like a car or savings account to borrow.
Lenders secure repayment other ways: Instead of collateral, they rely on a postdated check, ACH access to your checking account and rollover fees.
The APR is steep for such a short loan: A typical two-week payday loan runs 391% to 521%, per the CFPB.
Unsecured doesn't mean low risk: A failed withdrawal can trigger overdraft fees, rollover charges and a debt cycle — a $300 loan with a $45 fee can balloon to $480 after three rollovers.
Cheaper alternatives exist: Personal loans (6% to 36%), earned wage access, credit card cash advances and credit union PALs (capped at 28%) all cost far less.
Rules depend on your state: Payday lending is banned or effectively capped in 18 or more states and DC.
Summary generated by AI, verified by MoneyLion editors
What Is a Secured Loan?
A secured loan is one that is backed by a tangible asset, called collateral. This asset could be a car, a home or a savings account. Under the terms of a secured loan, the lender can seize the collateral if you don’t pay the loan as agreed. Mortgages and auto loans are common examples of secured loans, as are home equity loans and title loans.
What Is an Unsecured Loan?
An unsecured loan is not backed by physical collateral. The lender assesses your ability to pay off the loan based on your income, assets and previous history of timely payments. If you default on the loan, the lender can send your account to collections, but they can’t come after your property. Credit cards, personal loans and payday loans are examples of unsecured loans.
The table below compares secured vs. unsecured loans.
Feature | Secured Loan | Unsecured Loan |
Requires collateral? | Yes | No |
Risk to borrower | Lose the asset if you default | Collections, fees, bank withdrawals |
Approval factors | Asset value and credit | Income, credit, bank account |
Typical interest rates | Lower | Higher |
Just because a loan is unsecured doesn’t mean there are no consequences to not paying it. The lender will ask for a postdated check or authorization to withdraw funds from your bank account via the ACH (Automated Clearing House) network to repay the loan. If there is not enough money in your account to pay the loan when it’s due, you could be subject to collection actions, increased fees and damage to your credit.
Why Payday Loans Are Considered Unsecured
Payday loans are unsecured because the lender approves you based on your income and a post-dated check or bank access — not on any asset you pledge.
Instead of tying the loan to your car or savings, the lender relies on your next paycheck as the source of repayment. That's why approval can be quick and why the fees are so high — the lender takes on more risk without collateral to fall back on.
How Payday Lenders Secure Repayment Without Collateral
Payday lenders do not take your car, home or paycheck as collateral. Instead, they rely on three repayment mechanisms:
Postdated check: You write a check for the loan amount plus fees, dated for your next payday. The lender deposits it if you don’t pay in cash first.
ACH authorization: You authorize the lender to withdraw the full balance from your checking account via ACH on the due date.
Rollover or renewal fees: If you can’t cover the balance, many lenders let you roll the loan into a new term for another fee, which is how short-term debt often turns into a longer cycle.
While payday lenders don't require collateral, they want proof that their loan will be repaid. When applying for a payday loan, expect to provide:
Proof of income
Evidence of an active checking account
Government ID
Why Unsecured Doesn't Mean Low Risk
A payday loan is technically unsecured, but lenders take steps to ensure repayment. When you apply for a payday loan, you need to provide income and bank information so that the lender can withdraw the funds — the loan amount plus fees — on your next payday.
If you have other accounts set up for automatic withdrawals based on your pay schedule, make sure you have enough in your account to cover them in addition to the payday loan withdrawal. Otherwise, either your bills or your payday loan won't get paid, and/or you could be subject to overdraft fees.
If there is not enough money in your account when your payday loan is due, the lender may roll it over to the next pay period. They may charge you the same fee you agreed to when you took out the loan, doubling the amount you’re paying for the money. For example, if you get a payday loan for $500 and pay a $75 fee, the lender will attempt to withdraw $575 from your account on the next payday. If the money isn’t there, or you choose to roll it over, you’ll owe $650 on your next payday.
The ability to withdraw from your checking account and roll over the loan, with additional fees if the withdrawal attempt is unsuccessful, serves as a functional security for the lender. This makes it similar but not identical to collateral-based loans, such as title loans, that use your vehicle as collateral.
State Regulation of Payday Loans
Payday loan rules depend on where you live. Payday lending is banned outright or capped at rates that make it unworkable in 18 or more states and the District of Columbia, according to the Consumer Financial Protection Bureau. Other states set limits on loan size, fees and how often you can roll a loan over. Check your state's rules before you borrow so you know what a lender can and cannot charge you.
Risks of Unsecured Payday Loans That Borrowers Overlook
Unsecured payday loans can help in an emergency situation, but they are risky. Any borrower should understand these risks before signing a payday loan agreement.
High APRs and Short Repayment Windows
Even though the fees may seem small, payday loans have high annualized interest rates compared to other options. According to the CFPB, fees range from $10 to $30 per $100 borrowed. The fee for a loan that charges $15 per $100 for a two-week loan equates to an annual percentage rate of nearly 400%.
These loans are very short-term, as they are due on your next pay period. Depending on how often you get paid, this can be two to four weeks. When considering a payday loan, remember that a small loan principal does not equal a small cost.
How Payday Lenders Use Your Bank Account for Repayment
A payday lender will withdraw the loan amount plus fees from your bank account when the loan is due. There are risks associated with this process, especially if you have bills set up on automatic payment. The ACH debit from the payday lender could reduce your bank balance to the point that there isn't enough money to cover your other payments. This can result in overdraft fees, which further reduce your balance and create a financial spiral that can be difficult to overcome.
Why It’s Easy To Get Stuck in a Payday Loan Cycle
If you take out a payday loan and do not have enough money in your bank account to pay the loan when it is due, you may be able to roll over the loan to the next payday. This means you'll be charged an additional fee for the same loan, and it can quickly escalate.
Here's an example. Suppose you take out a $300 payday loan and the lender charges a $45 fee. Your next payday rolls around, and you don’t have $345 to pay the loan, so you roll it over. Your loan balance is now $390. If you roll it over again, you’ll owe $435. One more rollover? Now you owe $480. It adds up quickly.
👉 Pros and Cons of Payday Loans
Alternatives to Payday Loans
If you need cash fast, a few alternatives to expensive payday loans are available that cost less and carry less risk.
Personal Loans
A personal loan from a bank, credit union or online lender gives you a lump sum you pay back in fixed monthly installments. APRs often range from about 6% to 36%, which is far below payday loan rates, and repayment terms usually span 12 to 60 months.
Earned Wage Access
Earned wage access (EWA) is a program offered by some employers that allows employees to access a portion of their earned wages before their normal payday. Employers use a service like Chime® Workplace or DailyPay to provide on-demand pay to employees, with a small per-transaction fee. EWA is unsecured, but, like a payday loan, it reduces the amount of your subsequent paycheck.
Credit Card Cash Advance
A cash advance on a credit card carries a higher APR than regular purchases, often around 25% to 30%, plus a flat fee. It's still cheaper than a payday loan and doesn't require collateral.
Credit Union PALs
Some credit unions offer Payday Alternative Loans, which function like payday loans but with capped interest rates. PALs can be repaid over one to six months. You must be a member of the credit union for at least a month before you can apply. PALs, like payday loans, are unsecured.
Payment Plans and Hardship Programs
Utility companies, medical providers and landlords may offer payment plans or hardship deferrals. These options typically cost little to nothing and don't add new debt.
Comparison Table: Payday Loan vs. Alternatives
Option | Typical APR | Repayment term | Collateral needed | Main drawback |
|---|---|---|---|---|
Payday loan | 391% to 521% | 2 to 4 weeks | No | Rollover debt cycle |
Personal loan | 6% to 36% | 12 to 60 months | No | Missed payments hurt credit |
Earned wage access | Low fees | Next payday | No | Small fees can add up |
Credit card cash advance | 25% to 30% plus advance fees | Revolving | No | Interest starts right away |
Credit union PAL | Up to 28% plus application fee of up to $20 | 1 to 6 or 12 months depending on PAL type | No | Must be a credit union member |
Frequently Asked Questions About Payday Loans
Is a payday loan secured or unsecured?
A payday loan is unsecured. You don't pledge any collateral to borrow the money.
Can a payday lender take my car if I don't pay?
No. A payday loan is unsecured, so the lender can't take your car. A title loan is different — that one is secured by your vehicle.
Does a payday loan affect your credit score?
Most payday lenders don't report to the three credit bureaus — Equifax, Experian and TransUnion — when you pay on time. But if you default, the debt can be sent to collections and hurt your credit.
What happens if I can't repay a payday loan on time?
You may face rollover fees, extra interest and collection calls. Some states cap rollovers, so the rules depend on where you live.
Are payday loans considered unsecured debt in bankruptcy?
Yes. Payday loans are treated as unsecured debt in bankruptcy, similar to credit card balances.
Key Terms
Secured loan: A loan backed by collateral, like a mortgage or auto loan, that the lender can seize if you don't pay.
Unsecured loan: A loan not backed by collateral, approved on income and payment history — including payday loans, credit cards and personal loans.
Collateral: An asset you pledge to back a loan, such as a car, home or savings account.
Payday loan: A small, short-term unsecured loan, usually $500 or less, due on your next payday.
ACH authorization: Your permission for a lender to withdraw the balance directly from your checking account on the due date.
Rollover: Extending a loan you can't repay for another fee — how short-term debt turns into a longer cycle.
Annual percentage rate (APR): The yearly cost of borrowing, which turns a small payday fee into a triple-digit rate.
Payday Alternative Loan (PAL): A credit union loan capped at 28% APR, a lower-cost substitute for a payday loan.
Sources
Summary generated by AI, verified by MoneyLion editors
Melanie Grafil, CHFC™, contributed to editing this article.
Photo credit: Africa Studio / Shutterstock.com
Similar Posts
Disclosures
MoneyLion does not provide, own, control or guarantee third-party products or services accessible through its Marketplace (collectively, “Third-Party Products”). The Third-Party Products are owned, controlled or made available by third parties (the "Third-Party Providers"). Should you choose to purchase any Third-Party Products, the Third-Party Providers’ terms and privacy policies apply to your purchase, so you must agree to and understand those terms. The display on the MoneyLion website, app, or platform of any of a Third-Party Product or Third-Party Provider does not-in any way-imply, suggest, or constitute a recommendation by MoneyLion of that Third-Party Product or Third-Party Financial Provider. MoneyLion may receive compensation from third parties for referring you to the third party, their products or to their website.
This material is for informational purposes only and should not be construed as financial, legal, or tax advice. You should consult your own financial, legal, and tax advisors before engaging in any transaction. Information, including hypothetical projections of finances, may not take into account taxes, commissions, or other factors which may significantly affect potential outcomes. This material should not be considered an offer or recommendation to buy or sell a security. While information and sources are believed to be accurate, MoneyLion does not guarantee the accuracy or completeness of any information or source provided herein and is under no obligation to update this information. For more information about MoneyLion, please visit https://www.moneylion.com/terms-and-conditions/.
*Chime is a financial technology company, not a bank. Banking services provided by, and debit card issued by, The Bancorp Bank, N.A. or Stride Bank, N.A., Members FDIC.
Optional services and products may have fees or charges, such as outbound instant transfers, out-of-network transactions, and credit products. Learn more here.
Early access to direct deposit funds depends on the timing of the submission of the payment file from the payer. We generally make these funds available on the day the payment file is received, which may be up to two days earlier than the scheduled payment date.