Personal Loan and Cash Advance

By Credit Federal | Published 07/24/2008 | Unsecured Loan |

Unsecured Personal Loan and Cash Advance Uniqueness, History and Application

Ever wonder why; when you search for an unsecured personal loan, often you find a cash advance (also known as a payday loan)? Is the traditional personal loan (also known as a signature loan), the same thing as a cash advance loan?

The traditional personal loan (the unsecured variety) is roughly defined as a cash loan that does not require collateral, and generally has a relatively long term repayment of about 1 to 10 years. A cash advance personal loan; like a personal loan, does not require collateral. However, it has a short term of a week or two but can be extended (rolled over).

The traditional personal loan typically requires the borrower to have a good credit score for acceptance, whereas a cash advance loan will approve bad credit people.

There is another type of personal loan (the secured variety), which does indeed require collateral. Typically the borrower uses the equity of his/her home to secure the loan. It also has a long term like the unsecured personal loan, which could extended until the full mortgage repayment period if tied to the existing mortgage. And, like its unsecured version, it also generally requires the borrower to have good credit.

Other than length of term, the next major difference between an unsecured personal loan and a cash advance loan is the interest and fee structures. A personal loan charges the borrower an interest rate, whereas a cash advance loan charges a fee.

Because payday cash advances offer unsecured loans like that of traditional personal loans; and are now filling consumer cash-flow needs with increasing volume, they can be viewed as the newest personal loan option. If it's a bad credit personal loan you're seeking, you're options may likely be limited to a payday cash advance unless your local bank, credit union or other institution caters to customers with less than good credit.

Why are traditional, unsecured personal loans hard to find?

Many banks consider the small denomination loan amounts typical of unsecured personal loans as being too costly (fees and costs they must pay for credit report checks, application processing and loan management), and the interest payments gained are diminished by costs and fees. Also, many consumers prefer the ease of a credit card over waiting inline at a bank, submitting; and then awaiting approval for, a personal loan. Add to that the fact that many consumers who seek the traditional personal loan have bad credit and do not qualify. For these reasons, many banks have discontinued the unsecured personal loan option to the general public and limit it's availability to those customers who have equity. It's the decreasing reluctance of banks to offer traditional personal loans that contributes to the growth of the payday cash advance loan industry.

The payday advance service emerged in the early 1990s, and thrived as a result of consumer demand and changes in the financial services marketplace.

Today, industry analysts estimate that over 22,000 payday cash advance locations across the United States loan some $40 billion in short term credit to millions of households that need to fill cash shortages between paydays. It's much better; for example, to obtain a payday cash advance and pay a $30 fee than to not be able to make a credit card payment and get stuck with a late fee, and/or a bounced check fee, over-limit fee, and/or to suffer a bad credit rating due to one or more of these issues, as well as subsequently facing interest rate increases by all of their creditors who now view them as a high risk.