Lending and borrowing is one of the many activities that occur in a growing economy. Depending on their needs, borrowers choose from a range of different types of loans. Pay day loan can be categorized using a variety of parameters. Some of them include the following factors.
Secured versus Unsecured
When a loan is lent to a borrower, the lender faces a risk of not being paid back. This risk is called default risk and to minimize it, lenders issue debts that are secured by collateral. Collateral proves to be a back up for the lenders. One of the types of secured loans is title loans. A title loan is secured by a vehicle. All the borrower has to do is hand over his/her vehicle’s pink slip to the lender and continue to use the vehicle. Once the title loan has been paid back, the lender will return the pink slip to the borrower. However, if the borrower fails to pay back the lender in the designated payback period, the pink slip loans will enable the lender to sell it and recover his/her money.
Long-term versus Short-term
Any loan that has a payback time less than a year is a short term loan. Others are considered medium or long term loans. One example of a long term loan is a title loan. Title loans suit borrowers who have an urgent financial need. Likewise, they are expected to pay back the loan in a couple of months. This makes title loans short term loans. However, it must be noted that lenders of title loans do give a grace period to borrowers in case they are unable to pay back before they sell their collateral.
Public versus Private
Loans are also categorized on the basis of the parties that owe it into two groups – public and private. Public debt is owed by the government to different parties such as banks, businesses and citizens. They are issued in the form of bills, government bonds and securities. On the other hand, private debt is owed by parties other than governmental bodies. One example of private debt is title loans. Title loans are issued by lenders to citizens. Although these lenders are subjected to governmental policies that regulate the debt market, they still differ in their interest rates and other conditions that are offered to the borrowers.
Hence, title loans are secured, short term and private in nature. It must be noted that most short term loans are unsecured. Some of such short term unsecured loans include bank over drafts, credit card loans, pay day loans and student loans. Given the unsecure nature of these loans, the interest rates charged on them are very high. Also, unsecured loans are lent to only those with good credit scores. Hence, those with unsatisfactory credit scores are unable to help themselves during a financial emergency. Fortunately, such citizens can now help themselves by applying for title loans. Given the secure nature of title loans, credit scores are not used by lenders to judge loan applicants.