Pawn Shop Loans: What You Need To Consider Before Getting One

By Mark Di Vincenzo. May 7th 2016

Pawn shops have a pretty bad reputation and some of it is deserved. Pawn shop employees often don’t ask very many questions and their establishments are known as places where thieves can unload their acquisitions.

But pawn shops are not all bad. They loan money to people who have a desperate need for it and interest rates typically are lower than at other places that have a reputation for predatory lending.

Pawn shops have a pretty simple business model which has barely changed since the Chinese started pawn broking more than 2,000 years ago.

Here’s how it works: The borrower goes to a pawn shop with an item, such as jewelry, electronics, coins, tools or musical instruments, and the pawn shop offers him a short-term, fixed-rate loan, using the item as collateral to guarantee the loan. The borrower leaves with the money and a pawn ticket which includes a description of the item, the loan amount and the date the loan is due, usually 30, 60 or 90 days from the date the loan was obtained. After that, it’s up to the borrower. He can return and repay the loan, ask for more time to repay the loan or abandon the item and keep the money. If the latter happens, the pawnbroker keeps the item and sells it.

Before closing the deal on a pawn shop loan, first consider the pros and cons.

What Are The Pros Of Pawn Shop Loans?

  • Pawn shop loans, also known as pawnbroker loans, are quick and easy to get. There is very little paperwork and no need for a co-signer.
  • There are no credit checks. Why bother? The item the borrower pawns serves as collateral for the loan. So a borrower with the worst possible credit history can get a loan from a pawn shop.
  • If you can’t make the payments, it won’t hurt your credit score because nothing is reported to the credit bureaus and you won’t have a collection agency chasing you and harassing you with threatening phone calls.
  • You get your money right away. No need to wait for someone to process loan documents because there really aren’t any other than the pawn ticket.
  • In some cases, you can negotiate the loan amount you'd like to get. Pawnbrokers typically will try to take in items cheaply, but sometimes the amount offered can be boosted, especially if the item is easy to resell and the borrower is smart and knows the value of what he is using as collateral.
  • Sometimes, there is flexibility in the duration of the loan. Pawnbrokers may give customers more time to pay, but the maximum term rarely exceeds six months.
  • Pawn shop loans are cheaper than payday loans which can charge 400 percent annual interest rates or more. If someone gets a $100 loan from a pawn shop that charges 15 percent a month – 180 percent APR – he would pay $115 if he repays the loan in 30 days. Not bad, and some states, such as Indiana and New York, have capped monthly rates at 3 percent and 4 percent, respectively. (To learn more about payday loans, see The Pros And Cons Of Payday Loans.)

What Are The Cons Of Pawn Shop Loans?

  • The loan term typically is very short – as short as 30 days – giving the borrower very little time to repay the loan. If he really values the item he used as collateral, he risks losing it if he can’t repay the loan in time.
  • The interest rates may be cheaper than payday loans, but they are very high compared with traditional lenders. Obtain a pawn shop loan only if you have few other options. (For more information on loans you should stay away from, see 5 Different Types Of Loans You Should Never Get.)
  • When you take an item to a pawn shop to be appraised, expect the pawnbroker to base the loan amount on a very low appraisal of the item. Keep in mind that not all pawnbrokers will be willing to negotiate. A general rule is that the pawnbroker will give you about 30 percent of what he thinks he can get for the item if he ends up selling it.
  • Beware of monthly service fees, especially in states that have cracked down on pawn shop interest rates. Indiana is allowed to charge a 20-percent monthly fee. Some shops also charge extra for storage.
  • There is debate about whether the presence of pawn shops encourages theft, but many stolen items end up in pawn shops and dishonest pawnbrokers may move items out of their stores if they suspect they were stolen.
  • If you lose your pawn ticket, some pawn shop managers will not give you a chance to repay the loan and they will sell your collateral.

While it’s true that all pawn shops are not magnets for thieves and some people have benefited from pawn shop loans, they are not consumer friendly. Pawn shops offer loans that pale in comparison to the value of the item used for collateral. If you are considering a pawn shop loan, know what you’re getting into before you go through with it.


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