Are Pawn Shop Loans a Good Idea?
A pawn shop loan is a type of short-term, secured loan. Pawn shop loans don’t require a credit check, so they are often used as a type of emergency financing, like payday loans or car title loans. Still, like any financial decision, these loans have their pros and cons. Here’s what to know if you need cash fast and are considering taking out a pawn shop loan.
What is a pawn shop loan?
A pawn shop loan uses an asset that you own as collateral, which is exchanged for a cash payment. Typically, a pawnbroker will appraise the asset being used as collateral and pay you a percentage of its value. Nearly any item of value can be used to secure a pawn shop loan, including firearms, jewelry and electronics.
You’ll then have a set amount of time to repay the loan with interest. Each state regulates how long pawn shop loans can be and how much interest you can be charged. If you repay the loan successfully, your asset will be returned to you. However, if not, the pawn shop reserves the right to sell the item and keep the profits.
These loans are typically small loans with relatively short loan terms. The National Pawnbrokers Association estimates that the average pawn shop loan is worth $150 and has a 30-day repayment window.
How do pawn shop loans work?
The biggest benefit of pawn shop loans is that they have very lenient loan requirements compared with other forms of lending. You don’t need to provide proof of income or submit to a hard credit pull for one of these loans. You simply need to prove that you own the asset you’re using to secure it.
If you can prove that the item belongs to you, the pawnbroker will likely ask you questions to help assess its value. Once that’s settled, they’ll offer you a loan, usually worth between 25% and 60% of the item’s anticipated resale value. A pawn shop loan will come with fixed interest and, possibly, additional fees.
If you choose to accept the loan, the pawnbroker will give you a pawn ticket, which will act as the receipt for the transaction. It will also include the terms of your loan, specifying details like the loan amount, repayment window, interest rate, any fees and total amount due.
You’ll need the pawn ticket to reclaim your item when you’re ready to repay the loan. If you can’t repay it, you’ll lose ownership of the item. However, that will be the extent of your losses. Pawn shop loans are not reported to the credit bureaus, so your credit score won’t be impacted if you default on payment.
Pawn shop loan example
Interest rates on pawn shop loans are regulated at the state level, and they can be fairly high compared to the amount you’re borrowing. Here’s an example of how this type of lending could work:
Let’s say you decide to pawn a jewelry set worth $500 and the pawnbroker offers you $125, or 25% of its anticipated resale value. They also charge a 25% interest rate on the loan and give you a 30-day repayment window.
With those figures, you’d be responsible for paying $31.25 in interest charges. So in exchange for a $125 loan, you would owe a total of $156.25 in 30 days to retrieve your jewelry set. If you can’t repay the loan, the pawnbroker would keep your jewelry set.
Pawn shop vs. personal loan
If you can qualify for a personal loan, you may be able to get a better deal than with a pawn shop loan. While the interest rates on pawn shop loans can extend up to 25%, the average interest rate for personal loans as of February 2024 is just 12.49%.
When do pawn shop loans make sense?
Most of the time, you’ll be better off applying for a personal loan through a traditional lender. Often, personal loans can help you save money, build credit and access more funding than pawn shop loans. Still, there are a few occasions where choosing a pawn shop loan may make financial sense, including:
- You need fast cash: Some personal loan lenders do offer quick loans for fast cash. However, if you don’t want to undergo a credit check, a pawn shop loan can help you access funds in a matter of minutes without consideration for your credit.
- You only need to borrow a small amount: Since you’re only borrowing a percentage of an item’s value, pawn shop loans typically have fairly small loan amounts. If you need to access hundreds or even thousands of dollars, you may need to look into alternative options.
- You’re okay with using an item as collateral (and potentially losing it): If you are unable to pay back your pawn shop loan by its due date, the pawnbroker could sell your asset. If the item isn’t important to you, it may be worth the risk. But, if you value your asset and aren’t positive you can repay a loan, you may want to look elsewhere.
- You’re unbanked: When you don’t have access to a bank account, getting funding through traditional channels can be much more difficult. In this case, pawn shop loans can provide you with necessary funding and be a more affordable alternative to payday loans. Plus, it won’t affect your credit.
Pros and cons of pawn shop loans
There are many pros and cons of pawn shop loans. Here’s what you should consider as you weigh your options.
| Pros | Cons |
|---|---|
Easier to qualify for: You only need to provide proof of identity and ownership to take out a pawn shop loan. You don’t need to prove your income or undergo a credit check. Quick cash: Since they have a much more lenient application process, pawnbrokers can often fund your loan much quicker than traditional lenders. Won't impact your credit: If you can’t repay the loan, you’ll lose your asset — but it won’t impact your credit score. | Lost collateral: If you can’t repay the loan, the pawnbroker is allowed to keep your asset and sell it. They will keep the profit. Small loan amounts: Pawn shop loans are typically fairly small. If you need access to a large amount of money, these loans may not be a fit. Can be expensive: The interest rates on pawn shop loans can be much higher than other forms of financing, such as personal loans. |
Alternatives to pawn shop loans
Fortunately, if you don’t think a pawn shop loan is the right fit for you, there are plenty of other forms of lending available. Here are a few for you to consider:
- Sell your items: Consider selling your asset to a pawn shop or private buyer instead, which will eliminate the need to repay the loan with interest. A private buyer that you’ve found through a platform, like OfferUp or Facebook Marketplace, may pay more than a pawnbroker, but it may also take longer to complete the sale.
- Save up in an emergency fund: If you don’t need the money right away, think about saving up for your purchase in an emergency fund. This method will take longer, but it will keep your asset safe and help you save on fees and interest.
- Consider a payday alternative loan (PAL): Payday alternative loans are a type of short-term loan offered by credit unions, and their APRs are capped at 28%. You must be a member of a credit union that offers them in order to apply.
- Download a paycheck advance app: As the name suggests, paycheck advance apps can help you access funds from your paycheck a few days early. Just be sure to research an app’s fees before getting started.
- Use a buy now, pay later (BNPL) program: If you’re using the funds to make a purchase, BNPL apps like Affirm and Klarna can help you spread the purchase price out over a number of payments to make buying more affordable.
- Request a due date extension: Some utility providers and creditors offer bill forbearance programs that let you extend the grace period for your payment. If you think you need to pay a bill after its due date, contact your provider ASAP to ask about the options available to you.
- Research community assistance: Some charitable organizations have funds set up to help those in need. If you’re struggling to pay essential expenses, like rent and utilities, you may be a candidate.
How to break the debt cycle
If you feel like you’re stuck in a cycle of debt, borrowing more money in the form of a pawn shop loan may not be the right answer. In that case, here are some steps you can take to work toward becoming debt-free:
- Make a budget: When you’re unsure where your money is going, creating a budget can help you get some clarity around your spending habits. It can also help you better allocate your income so that you’re able to work toward larger personal finance goals.
- Follow a debt payoff plan: On the other hand, if you feel stuck trying to tackle your existing debts, think about implementing a debt payoff plan, like the debt snowball method or debt avalanche method. Structuring how you’ll pay off debt can help it feel less overwhelming and may even help you get to a zero balance faster.
- Consider credit counseling: Finally, if you don’t feel like you can tackle your debt on your own, consider signing up for credit counseling. A certified credit counselor can help you learn better financial management strategies and may assist you in working with your creditors to pay back what you owe.