Unsecured Signature Loans Should Be Avoided

If you are looking at unsecured signature loans, you might want to rethink your plan of action. Unsecured signature loans are short-term debt obligations that are not secured through any sort of collateral. First time borrowers can usually borrow up to $1500. You can get cash immediately, usually overnight. You only need to provide proof of employment and have a valid checking account. You can use for the money for any reason, whatsoever.

You can get cash overnight. You can borrow up to $1500. You do not have to put up any collateral. All of this, makes it sound like unsecured signature loans would be a good thing. So why should these loans be avoided?

By far and away, the biggest problem with these types of loans is the expense. The ability to borrow money without having to put up collateral may be appealing, but the fees and interest rates that are associated with these types of loans is prohibitive. How much does it cost to borrow money via unsecured signature loans?

Unsecured Signature Loans: Advantages

• No collateral required
• Get cash immediately, usually on the next business day
• Borrow as much as $1500

These unsecured signature loans are also often referred to as payday loans. The name payday loans implies that the loans have something to do with the borrower’s payday. They do. These loans are extremely short term loans. Sometimes, the loans must be repaid on the borrower’s next payday. Since may people get paid every two weeks, that means that the duration of the loan could two weeks or less.

Oftentimes, the lenders who provide these sorts of unsecured signature loans will charge between $15 and $22 for every $100 that is borrowed. Thus, if someone wants to borrow $1000, they would have to pay at least $150 in interest. Is that a lot of money? It doesn’t sound like a lot of money.

Having to spend “only” $15 for every $100 that is borrowed might not seem like all that much money, in absolute terms.  However, let’s take a look at this in a bit more detail. On the surface, it may seem as though the interest rate being charged is 15% ($15 in fees divided by $100 borrow.) Remember, however that the money is not being loaned for a one year period. The money is being borrowed for a much shorter period of time than one year. The due date for these loans could be, as was mentioned above, as short as two weeks. Since the loan may be due in just two weeks, the effective annualized interest rate would be 390%! As incredible as that might sound, it can be much worse than that. If the interest that is charged for the unsecured signature loan is compounded daily, then the annualized rate of interest would be an astonishing 3685%!

While this sounds incredible, it actually can get even worse than that. The biggest problem with these loans is that people are unable to pay back the principal when it is due. In these instances, what usually happens is that the payday lenders will offer the borrower the opportunity to take out a new loan to pay off the old loan. Essentially this means that the borrower ends up in a situation whereby they ultimately wind up paying more in interest than they originally borrowed, sometimes significantly more.

A 2010 article in the Dallas Morning News, follows Yvonne Sands, a 74 year old woman who was in the situation. She borrowed about $1800 amongst four separate payday loans, and then over the next year, she had paid more than $4200 in fees on those loans. The cost to borrow money through these types of lenders is much higher than is legally allowed in the United States. How can these lenders charge this much?

Lenders that offer those unsecured signature loans are able to charge as much as they do because they are not actually classified as lenders at all. In Texas, and in several other states, these “lenders” are classified as “credit service organizations.” This allows them to sidestep the legal limitations on the amount of interest and fees that they can legally charge when loaning money to borrowers. They are allowed to charge higher fees than banks and  typical lending institutions because technically they are not making loans. According to the law, they are connecting borrowers with lenders.

Unsecured Signature Loans: Disadvantages

• Incredibly high annualized interest rates
• Any difficulty paying off the loans will likely results in exorbitant costs
• Borrowers might have a difficult time untangling themselves from these loans

The troubles that Yvonne Sands, the woman from the Dallas Morning News story, had are not isolated. There are many other people who have taken out signature loans, not been able to repay them and have ended up in the same situation as Ms. Sands.

How do people end up in this situation? Typically it happens because people overextend themselves. They allow their expenses to exceed their income levels and need to obtain a little extra cash to help them make ends meet. The problem gets exacerbated when the borrowers are unable to repay the loan in a timely manner. It is not surprising that these borrowers are unable to repay their loans in a timely manner. After all, these are people who tend to live paycheck-to-paycheck. They typically spend their entire income, and will often spend more than they earn, requiring them to get payday loans in the first place. It is advisable to do everything that you can to avoid these types of loans.

An article in the Los Angeles Times summarizes the polar opposite points of view that exist regarding these types of loans. Consumer groups argue that these loans are very bad for consumers as they can charge 400% or more in interest and fees to those people who obtain these loans. The signature loan (payday loan) industry argues that these loans serve a valuable purpose in society – they offer short term loans to people who are cash strapped and have no place else to turn.

The article goes on the indicate that, at present, there is pending legislature on the California Senate floor. The pending bill would increase the payday loans in California from $300 to $500.

An Alternative to Unsecured Signature Loans

A far better solution to dealing with financial difficulties than considering unsecured signature loans is to just spend less. It may sound overly simplistic, but it is a very important concept. People need to do everything that they can to spend less than they earn. If your take home pay is $2500 per month, you need to assess your expenses and make sure that you never spend more than that. Ideally, your monthly expenses should be less than your $2500 take home pay.

If you find yourself in an emergency situation where you need cash and you have absolutely no other option, then you will have to consider these unsecured signature loans. If you do find yourself in this unfortunate situation, make certain that you are able to repay the payday loan when it is due. If you fail to do this, you may end up like Ms. Sands and be paying more than twice as much in fees as the principal amount that you originally borrowed.