How Do Pawnshop Loans Work?

If you need cash right away and you own something of value, you might consider taking out a pawnshop loan.

These secured loans are relatively quick and easy. You’ll head to a pawnshop and bring your property as collateral in exchange for cash.

But a pawn loan is different from other types of debts because you’re not obligated to repay it, as long as you’re OK with forfeiting the collateral. While pawn loans come with some upsides, you should understand all of their features before using one.

If you want a pawnshop loan, the pawnbroker will not pull your credit but instead offer you a loan based on the value, condition and resale potential of your item. The amount you get largely depends on the pawnshop, which might lend as little as 15% or as much as 60% of the item’s resale value.

The shop also decides which items it accepts. You may, for instance, be able to pawn electronics, musical instruments, tools, guns, pieces of jewelry and artwork, and other goods. You’ll need to be at least 18 years old, show some form of identification and may have to confirm that you own the item.

If you accept a loan, you will receive cash and leave your item with the shop as collateral. You will get a ticket, used after repaying your loan to pick up your property.

Loans are generally small. The average pawn loan is $150 nationwide and repaid within about 30 days, according to the National Pawnbrokers Association.

Loan terms, interest rates and fees for pawn loans vary widely by state. Shops will typically hold your collateral for at least 30 days before selling it and charge interest rates of 12% to 240% or more. They may also add fees for storage and insurance.

If you can’t repay your loan in full by the due date, you may be able to extend or renew it. The pawnshop may require you to pay a fee or interest that has accumulated on the loan. But if you can’t repay the loan at all, you lose your collateral to the pawnshop.

How Do Pawnshop Loans Differ From Payday Loans?

A payday loan is typically a short-term, high-cost loan for less than $1,000 that’s repaid on the borrower’s next payday. These loans come with annual percentage rates of almost 400% and fees of $10 to $30 for each $100 borrowed, according to the Consumer Financial Protection Bureau.

Payday and pawnshop loans share some similarities but are not identical. They are both small-dollar loans with short terms and no credit checks, and they come from nonbank lenders. But pawnshop loans are typically much smaller than payday loans, may have slightly lower interest rates, and don’t require repayment.

Either of these loans isn’t great for your finances.

“Payday loans can get you into a cycle of taking out a new loan to pay off the old loan, and the interest rates are very high,” says Amy Lins, vice president of enterprise learning at Money Management International, a nonprofit credit counseling agency. “A pawnshop loan could end up costing a lot if you can’t redeem the item and the pawnshop sells it.”

Pros and Cons of Pawnshop Loans

No legal requirement to repay the loan. About 15% of pawnshop loans are never paid back. “You can walk away from a pawn at any point with zero recourse,” says Kelly Swisher, owner of Arlington Jewelry & Pawn in Illinois. That means you won’t be harassed by debt collectors or sued if you don’t repay.

No effect on your credit. A pawnbroker won’t pull your credit before making a pawn loan or report the loan to the credit bureaus. If you can’t repay the loan, you won’t see your credit suffer.
Quick access to cash. You may wait a few days with a traditional loan to get money, but a pawn loan can take just minutes.
Usually less costly than credit card and bank penalties. The fees and interest charges on pawnshop loans may cost less than the penalty for each overdraft of your checking account or late fee on your credit card bill. Overdraft fees can cost up to $35 per incident and late fees can run up to $41, plus you risk damage to your credit score when you miss a credit card payment.

Loss of collateral. You’ll forfeit your collateral if you can’t repay your loan.
Potentially high cost. The interest rates on pawnshop loans can reach triple digits in some states. That’s much higher than 36% APR, which consumer advocates say is the cap for affordable small loans. You might also pay fees for storage and insurance or loan renewal.
Not a long-term financial solution. “Quick-cash loans fill a short-term need but can’t fix the underlying problem,” Lins says. If you regularly run out of money before payday, it may be a sign to cut back expenses or increase your income if possible.
Dishonest pawnshops. The Consumer Financial Protection Bureau has taken legal action against pawnshops that allegedly misrepresented the annual costs of pawn loans.

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When Using a Pawnshop Loan Might Make Sense

A pawnshop loan might work in a couple of distinct situations. It could make sense in a financial emergency if you need a little quick cash and know you will have the money in 30 days to repay the loan. You might also choose a pawnshop loan if you don’t have a bank account or qualify for a traditional loan.

“They may be the least expensive or even only option for some people with poor credit to get a loan,” says Erik Carter, a certified financial planner with Financial Finesse, a workplace financial education provider. “You can get the cash pretty quickly, and losing the collateral can be much less consequential than losing your home or vehicle.”

However, a pawnshop loan “should be a loan of last resort,” Lins says, because it can get expensive. You also may not be able to borrow enough if you need more than $150 – the average pawn loan – and should explore alternatives if you’re uncomfortable putting up your valuables as collateral.