Is a Payday Loan Secured or Unsecured? What That Means and How It Works

Payday loans are unsecured — no collateral is required, and lenders secure repayment by holding a postdated check or by getting your authorization to debit your bank account through ACH on your next payday.

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.

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Key Takeaways

• Payday loans are unsecured, but lenders still secure repayment by holding a postdated check or pulling funds from your bank account via ACH on your next payday.

• The real cost is steep — fees of $10 to $30 per $100 borrowed translate to APRs of 391% to 521%, and rollovers can quickly trap you in a cycle of debt.

• Before you borrow, compare alternatives like small personal loans, credit union Payday Alternative Loans, earned wage access or a credit card cash advance — all typically cost far less than a payday loan.

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.

JJust 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 ACH 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.

👉 What Is a Payday Loan?

Why Are Payday Loans Considered Unsecured?

Payday loans are considered unsecured because they don't require collateral. Instead, lenders rely on your next paycheck and direct access to your bank account for repayment.

Payday loans are short-term, small-dollar loans — usually $500 or less — with annual percentage rates (APRs) that run from 391% to 521% on a typical two-week term, according to the Consumer Financial Protection Bureau. You pay a flat fee of $10 to $30 for every $100 you borrow, and the full balance is due on your next payday.

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 another fee for the same loan, and this can quickly escalate.

Here's an example. Suppose you take out a payday loan for $300, 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

There are alternatives to expensive payday loans. Here are some other things to try if you have a short-term cash crunch.

Small Personal Loans

If you qualify, you may be able to get a small personal loan to tide you over. You’ll need to pass a credit check, but you can make installment payments instead of paying it back all at once, and your interest rate is likely to be much lower. Personal loans are unsecured.

Earned Wage Access

Earned Wage Access (EWA) is a program offered by some employers that allows employees to access a portion of the money they’ve earned 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

If you have a credit card that has an available balance, you may be able to get a cash advance. You’ll pay a fee and interest starting from the date of withdrawal, but you can spread the payments out if you need to. Your total costs will usually be far lower than with a payday loan. Credit card cash advances are unsecured.

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.

FAQs

Can a payday lender take my car if I don't pay?

No. Payday loans are unsecured, so the lender has no legal right to your car or any other asset. If you do not pay, the lender can try to collect through your bank account, send the debt to collections or sue you for the balance.

Does a payday loan affect your credit score?

Usually no, but it can. Most payday lenders do not report on-time payments to the three credit bureaus — Equifax, Experian and TransUnion — but a missed payment sent to collections or a court judgment can show up and hurt your credit score.

What happens if you default on a payday loan?

The lender may roll over your loan, charging you an additional fee. If they still can't collect, they will send your account to a collection agency, which will try to collect the debt.

Are online payday loans unsecured, too?

Yes. Online payday loans don’t require collateral.

Is a title loan better than a payday loan?

That depends on your situation. If you default on a title loan, the lender can repossess your vehicle, but a title loan may cost you less than a payday loan, and you may qualify for a larger loan amount.

Key Terms

• Payday loan: A short-term, high-cost loan, usually for $500 or less, that’s typically due on your next payday.

• Unsecured loan: A loan that doesn’t require collateral. Approval is usually based on your income, credit and ability to repay.

• Secured loan: A loan backed by collateral, such as a car or home. If you don’t repay it, the lender can take the asset.

• Collateral: Something you own that secures a loan. If you default, the lender may take it to recover what you owe.

• Annual percentage rate (APR): The yearly cost of borrowing money, shown as a %. It helps you compare loan costs more clearly.

Sources:

• Consumer Financial Protection Bureau: What is a payday loan?

• Consumer Financial Protection Bureau: Financial Terms Glossary

• Consumer Financial Protection Bureau: Credit card key terms

Summary generated by AI, verified by MoneyLion editors

Melanie Grafil, CFHC™, contributed to the editing of this article.