How Do Pawn Shop Loans Work (and What are the Alternatives)?

When you need money quickly, it can be tempting to take advantage of short-term lending options to get your hands on some cash. As appealing as these quick loans might be, it’s important to ask yourself whether the disadvantages of things like pawn shop loans outweigh the advantages.

At Addition Financial, we believe in informing our members about everything related to finance, including risky short-term lending options such as pawn shop loans. Here’s what you need to know before you decide to bring a valuable item to a pawn shop to get a loan.

What is a Pawn Shop Loan?

When people think about pawn shops, they tend to imagine shady places that they’ve seen in movies and on television. However, pawn shops are highly regulated and many are legitimate businesses. But what about pawn shop loans?

A pawn shop loan is a collateral loan. You bring an item of value to a pawn shop and negotiate the terms of the loan including the amount, interest rate and fees. The item you offer is the collateral for the loan. That means the amount you borrow will be determined by the potential resale value of the item you pawn.

The interest rates for pawn shop loans average about 10% per month. If you borrowed $100 and had a loan term of three months, you would need to pay back $130 to retrieve your item. Some pawn shops charge insurance and storage fees as well. For example, in Florida, a pawn shop may not charge fees that total more than 25% of the amount loaned for a 30-day period. They must also disclose the annual interest rate, which for a 25% rate for 30 days would translate to a 304% annual interest rate.

The high interest rates charged for pawn loans put them clearly in the category of predatory lending.

How Do Pawn Shop Loans Work?

Pawn shop loans are unlike credit union or bank loans in that they require no credit check or proof of employment. The loan is granted based solely upon the resale value of the item being pawned.

To get a pawn loan, you would bring one or more items to a pawn shop. The shop owner will evaluate the items and offer you a loan, typically only a small percentage of the item’s value. They should also explain their fees, which are based on the loan amount. In return for your items, they will give you a pawn ticket. The pawn ticket should include details about the loan, including a description of the item, the fees and the expiration date of the loan.

In most cases, the pawn shop loan will have a term between one and four months. Those terms are somewhat negotiable and you should make sure that you understand the terms and that they are clearly described on the pawn ticket.

A common misconception about pawn shops is that they always buy items outright. That is usually not the case because pawn shop owners know they can make more money by granting loans. If they buy the item outright, they would pay more money than they would for a loan and not earn any fees. The advantages of loans are clear when you view them from a pawnbroker’s perspective.

How Are Pawn Shop Loans Paid?

When a pawn shop loan comes due, you may pay it one of two ways:

  1. Return to the pawn shop, repay the loan amount plus any fees and reclaim the item(s) you used as collateral.
  2. Do not return to the pawn shop, in which case the owner retains possession of your item, attempts to sell it and keeps any profits they make in doing so.

Because the owner has the option of keeping your item, pawn shop loans are low risk for them. Most owners won’t accept items they think they won’t be able to sell. Because they loan you only a small percentage of what the item is worth, they have reasonable certainty that they’ll come out on top either way. They’ll get repaid and keep the fees or they’ll sell the item and keep everything.

The risk for borrowers is clear. If you bring something that has value to you, whether its value is primarily financial or sentimental, you run the risk of losing it if you’re not able to repay the loan when it comes due. Considering how exorbitant the interest rates are, you should be cautious about using a valuable item as collateral for a short term loan such as a pawn loan.

In many states, including Florida, it’s up to the discretion of the pawn shop to decide to extend the terms of the loan. If they do so, they will require you to pay the fees for the initial term. In this way, they are like payday loans or car title loans. A lot of people get trapped in a cycle of borrowing that they can’t escape and, as a result, they pay far more than the initial loan amount and potentially, more than their pawned item is worth.

Can a Pawn Shop Sell Your Pawned Item?

One of the most common misconceptions about pawn shops is that they sell every item they receive. When you bring something to a pawn shop and get a loan for quick cash, the shop does not have the right to sell your pawned item during the loan term.

The only scenario in which your item would be sold would be if you failed to return to pay the loan balance and fees. At that point, the shop owns the item you pawned and has the legal right to sell it for any amount they choose.

Any item you pawn should be something you can afford to lose, particularly if you think there’s a chance you might not be able to repay the loan with interest. 

When Are Pawn Shop Loans a Smart Move?

You might be asking yourself, why would someone go to a pawnbroker to get a loan? The short answer is that most people who get pawn shop loans are in need of quick cash to pay a debt or deal with an emergency.

Pawn loans can be appealing to people who don’t have good credit and may worry that they won’t be approved for a credit union or bank loan. The requirements for a pawn shop loan are minimal, with no credit check or proof of income and employment required. Provided you have an item that the pawn shop wants, you can usually get money the same day.

We’ve already talked about the risks associated with these loans, which include high payments and the possibility that you will lose something valuable to you if you’re not able to repay the loan when it comes due. Let’s talk about when a pawn shop loan might seem to be worthwhile:

  • You have a valuable item that you wouldn’t mind parting with in return for some quick cash.
  • You don’t have another, more affordable or less risky way to get the money you need.
  • You have a good reason to believe that you’ll be able to repay the loan and fees at the end of the loan term.

If all three of these things are true, then a pawn shop loan can help you with some quick cash. However, the predatory terms and excessive fees make these loans risky and we do not recommend them.

What Are Some Alternatives to Pawn Shop Loans?

The good news is that there are alternatives you can use to get money quickly. The predatory nature of pawn shop loans makes them extremely risky. 

Here are some alternatives to consider:

  1. Sell items outright, but do it on eBay or Facebook Marketplace. That way, you will pay only a minimal fee and get to retain everything else you earn.
  2. Borrow money from a friend or family member. If all you need is a short-term cash loan, you may know somebody who’d be willing to give you a short-term loan at terms far more reasonable than what you could get at a pawn shop.
  3. Get a cash advance on your credit card. While the finance rates for cash advances are typically higher than the regular interest rate on a card, they are still significantly lower than pawn shop interest rates.
  4. Talk to your bank or credit union about a loan. While personal loans require proof of employment and a credit check, many lenders are willing to work with people to get them a loan even if their credit isn’t ideal.
  5. Monetize your hobby. A lot of people earn extra money by doing things they love, such as knitting or painting, and selling their items on Etsy and other sites.

Pawn shop loans are certainly easy to get, but the cost of repaying them is too high. We recommend using one of these alternatives to get the money you need.

Pawn shop loans are widely available but they are also risky and predatory, charging interest rates and fees that can trap borrowers in an endless cycle of debt. The key takeaway here is that the risks far outweigh the benefits and there are alternatives available if you need money.

Are you in the market for a personal loan? Addition Financial offers a wide array of loan products. Click here to read about your options and begin the application process today.

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