If you’ve ever needed access to quick cash but have trouble qualifying for a conventional loan, you may have considered a pawnshop loan. A pawnshop loan allows you to use a personal item of value as collateral in exchange for instant cash.
Generally speaking, it is not a good idea to get a pawnshop loan: These loans can be very risky and often come with expensive interest rates and fees. Note too that pawnshop loans often use predatory tactics when lending. You should look into other options, such as a secured loan or a personal loan, before pursuing this option.
Let’s explore the ins and outs of how a pawnshop loan works to help you determine if one is right for you, or if you can find a better alternative.
How Does a Pawnshop Loan Work?
A pawnshop loan is a short-term loan in which you hand over personal collateral — such as a musical instrument, a valuable piece of jewelry or a collectible item — to a pawnshop in exchange for borrowing money. The pawnshop will assess the value of the item and offer a loan based on that amount. The loan amount offered will likely be less than the assessed value of the item.
If you accept the loan, you will be given a lump sum and a pawn ticket. This ticket is needed to reclaim the item when repaying the loan. Typically, pawnshop loans must be paid back in full in order to get the collateral back. Upon repayment, the pawned item is returned to you. The repayment timeline varies from state to state.
What Happens If I Default on a Pawnshop Loan?
Defaulting on a pawnshop loan may cause emotional and financial stress. If you can’t repay the loan, the pawnshop will be able to keep your collateral. However, defaulting on a pawnshop loan generally won’t have any impact on your credit score.
If you’re facing the possibility of defaulting on a pawnshop loan, you may still have options. Some pawnshops may offer an extension on the loan. They will likely require you to pay the interest on the loan before extending it. If no payment can be made, then the item you used to secure the loan will be up for forfeiture. When this happens, the pawnshop will be able to sell your item.
Pros and Cons of a Pawnshop Loan
As with any loan, there are advantages and disadvantages to pawnshop loans. It’s important to thoroughly examine the pros and cons before determining whether a pawnshop loan is right for you.
Pros
Fast cash: Pawnshop loans offer quick access to small amounts of cash.
No credit check: No credit check is required for a pawnshop loan. Even if you don’t have a bank account or have poor credit, you can pawn items in exchange for a loan.
No impact on credit score: If you don’t pay back the loan, the pawnshop keeps the collateral. There is no impact on your credit score.
Cons
High interest rates: Pawnshop loans tend to have high interest rates, fees and other costs associated with them.
Small loans: Large loan amounts are generally not available from pawnshop loans.
Item forfeiture: Failure to repay the loan means you will lose your pawned item.
Bad reputation: Pawnshops don’t have the best reputation. There have been complaints made to the Consumer Financial Protection Bureau alleging that pawnshops have not followed lending laws.
Why Are Pawnshop Loans a Bad Idea?
Pawnshop loans can be predatory and put you in a challenging financial position. If you can’t pay back the loan, you may end up taking out new loans to pay back the pawnshop loan, leaving you in a vicious cycle of debt that is difficult to get out of. A debt cycle can cause you financial stress because you are constantly using one loan to pay back another, accruing fees along the way.
Due to their high interest rates and fees, pawnshop loans are often not the best option when looking for quick cash. Beyond the fees, having an emotional attachment to the pawned item makes the possibility of losing it much harder.
High Interest Rates
High interest rates and fees typically render pawnshop loans an undesirable option for borrowers. Interest rates on pawnshop loans often fall between 20% and 25% per month, and the pawnshop may charge additional fees, such as a storage fee for your collateral. These fees can result in an annual percentage rate (APR) that may exceed 200%.
Other borrowing options may offer lower interest rates and fees. Having a good credit score will typically help you qualify for better loans and secure lower interest rates. Options such as personal loans, secured loans, friends and family loans and credit cards typically have a lower APR than pawnshop loans.
Emotional Attachment to Collateral
In addition to financial stress, pawnshop loans can take an emotional toll. Often, you are forced to use sentimental items as your collateral, and the risk that you may not get your item back if you can’t repay the loan can be significant. Pawning a family heirloom or valuable can also lead to tension within the family.
Besides pawnshop loans, other types of loans use collateral, such as home equity loans and vehicle title loans. Any loan that uses collateral may cause you emotional stress, as most items used for collateral are valuable to you in ways that exceed financial value.
Alternatives to Pawnshop Loans
If you need quick cash, it may be worth exploring alternatives to pawnshop loans. Personal loans, secured loans and friend and family loans may all be viable options. Each of these loan types comes with its own terms and conditions, so be sure to do thorough research into each before deciding if one is right for you.
Personal Loans
Personal loans are one common alternative to pawnshop loans. These loans are generally fixed-rate installment loans that can be used for any purpose, including debt consolidation, medical expenses and unexpected emergencies.
Because personal loans are often issued by banks, credit unions or online lenders, there are many lenders available to compare terms. Most personal loans have lower interest rates and longer repayment terms compared to a pawnshop loan, which may be less financially and emotionally stressful. Typically, you must repay the loan in monthly installments.
Secured Loans
Secured loans are any type of loan that requires you to put up collateral, which can include assets like a home, car or even stocks and bonds. Secured loans are typically issued by a bank or a credit union. Getting a secured loan from a financial institution may come with lower interest rates and longer repayment terms, making them a good option for many borrowers. That said, if you don’t repay the loan, you may forfeit your collateral.
Many credit unions offer secured loans but may require you to become a member of the credit union. To become a member of a credit union, you’ll need to meet its specific criteria. Many credit unions require their members to share a common bond, such as an occupation, geographic location, family member or membership to a specific group. Members of credit unions are often offered higher savings rates and lower interest rates.
Friends and Family Loans
It may be possible for you to borrow from friends and family if you require a loan. This type of loan can be helpful because the terms may be flexible and are agreed upon by you and your friend or family member. You and your loved one will have to negotiate a payment plan, interest and other loan terms. It is wise to get this loan in written form so that both parties can go back to the paperwork if there is ever an issue.
Borrowing money from family or friends can cause stress and tension. Your loved one may feel entitled to know more about your finances than you want to share. It’s important to maintain healthy boundaries about what you are and aren’t comfortable sharing when borrowing money from a family member or friend. Having a clear repayment plan can help lower stress for both parties.
The Bottom Line
Pawnshop loans require collateral in exchange for a small cash loan. When considering a pawnshop loan, it’s important to examine the potential benefits and consequences. You may be able to access quick cash, but the repayment terms are often short and expensive. If a pawnshop loan isn’t paid back, the item that was put up for collateral can be retained and sold by the pawnshop.
Whenever you are considering getting any type of loan, research your options thoroughly. There are many different types of loans available and it’s important to find one that fits your borrowing needs. Although a pawnshop loan may sound like a good idea, it can come with high emotional stress and the possibility of falling into a cycle of debt.
Frequently Asked Questions About Pawnshop Loans
Pawnshop loans often use predatory tactics when lending. These tactics may result in loan terms and fees that are illegal. For example, the Consumer Financial Protection Bureau sued pawnshops that were charging military families higher interest rates than they were allowed to.
No, a pawnshop loan is a secured loan. You offer up collateral in exchange for the loan. If the loan isn’t paid back, you will lose your item, but your credit score won’t be impacted.
Pawnshop loans have high interest rates and fees, which can make them difficult to pay back. Additionally, the amount of the loan is typically lower than the value of the collateral.
Generally speaking, it is not a good idea to get a pawnshop loan. Due to their predatory nature, high fees and low loan value, pawnshop loans are often not a great option. If you need money, consider alternatives such as a loan from a friend or family member, a personal loan or a credit card.
Editor’s Note: Before making significant financial decisions, consider reviewing your options with someoneyou trust, such as a financial adviser, credit counselor or financial professional, since every person’s situation and needs are different.
If you have feedback or questions about this article, please email the MarketWatch Guides team at editors@marketwatchguides.com.
