Personal Loans

Pawn Shop Loans vs. Personal Loans: What’s the Difference?

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Every now and then, we might need fast cash. It can be tempting to head down to a pawn shop and get the money needed for a short-term emergency. After all, it’s fairly simple to walk in with an item and walk out with the cash.

Unfortunately, there are a lot of downsides to pawn shop loans — and these disadvantages don’t make up for the fast access to cash. Instead, it might make more sense to consider your personal loan options. Today, many personal loans can be closed quickly and you can get your money fast, but without as many issues. Here’s what you need to know to make your best decisions for your finances.

How pawn shop loans work

With a pawn shop loan, you bring in your property and leave it behind in return for cash. You have a few months to repay the loan, and if you don’t, the pawn shop owner can keep the item and potentially re-sell it. You’ll be given a ticket that you have to show in order to get your property back when you repay the loan, so it’s a good idea to take a picture of it and then save the image file.

In most cases, you’re likely to get 25% to 60% of your item’s value. What you’re offered depends on the pawn shop owner, and whether they think they can sell it for a good price. So, if you need $500 to help you pay for car repairs, the item you bring in might need to be worth between $833 and $2,000.

For best results, you might need to bring in:

  • Jewelry
  • Electronics (usually current and in-demand)
  • Musical instruments
  • Camera equipment (especially digital)
  • Firearms

You might also need to provide proof of purchase or some other indication that you didn’t steal the item. Before bringing something in, call ahead to find out what the pawn shop requires to make a loan.

You can also sell the item outright at a pawn shop, without the worry of shipping to a buyer, or going through a lengthy negotiation process.

For the most part, with a pawn shop loan, you don’t have to worry about a credit check. Plus, because you offer collateral, there’s no negative impact on your credit score if you don’t repay the loan. Because of how quickly you can get cash without worrying about credit, pawn shop loans can seem like an attractive option — even if it’s not the best choice.

How personal loans work

A pawn shop loan is always secured since you have to provide an item in order to get the cash. However, a personal loan can either be secured or unsecured. Many personal loans, though, are unsecured — so you don’t have to provide collateral and don’t put a personal possession at risk when you get one.

When you apply for an unsecured personal loan, the lender takes into account your income and credit, along with other information. For small loans around $500, you might be able to get a signature loan from your bank or credit union, based mainly on the strength of your past business dealings. However, if you need more than $2,000 or $3,000, you’ll probably need to apply for a loan.

Personal loans often come with APRs as low as 2.49%. LendingTree’s personal loan marketplace offers information on a number of lenders with different credit requirements, some of which can deposit funds in your bank account within a few business days. In fact, some lenders can promise funds within a single business day.

You might have to pay origination fees, so pay attention. For example, if you borrow $100, you want to get the total APR to figure out if something is a good deal. One loan might have a rate of 15%, but a $0 origination fee. Another loan might charge 8.25% and have a fee of $15. Once you figure the total APR, though, the first loan remains 15%, while the second, because of the fee, is actually 35.41%.

The rate you end up with, though, depends largely on your credit. If you have good credit, you can usually get a low-cost personal loan. Lower credit scores could mean higher interest rates. In some cases, if you have very poor credit, you might not qualify for a personal loan at all.

4 reasons why you should avoid pawn shop loans

Before you decide on a pawnshop loan, it’s important to understand that they are often near the bottom of the list when it comes to “good” borrowing options. Here are some of the main reasons to be wary of using pawn shop loans.

1. Pawn shop loans have high costs

No matter the cost, though, a personal loan is still likely to have a lower total APR than a pawnshop loan. It’s hard to calculate, since pawn shops charge fees instead of interest rates, but the fees can translate to effective APRs of above 240%.

In many cases, only payday loans (and sometimes car title loans) have higher costs than pawn shop loans.

2. You could lose your property

Perhaps you’re bringing a valuable heirloom in, out of desperation, but you plan to get the object back. If you experience another emergency, or there’s some other issue with getting the money you need to repay the loan, you lose the item.

It might not be as devastating as losing your vehicle to a car title loan, but it can still be difficult to cope with — and that property might have been even more valuable to you for sentimental reasons.

3. Many pawn shop loans are small dollar

According to the National Pawnbrokers Association, the average amount of a pawn shop loan is $150. If you want a bigger dollar amount, you need a more valuable item — and that could mean an even bigger loss if you can’t repay the loan.

If you need a bigger loan, a pawn shop might not be the answer, especially if you’re putting something that could be considered irreplaceable at risk.

4. You can get caught in a costly cycle

Let’s say you decide to pawn an iPad for a couple of weeks. You might have paid $900 for it, but maybe you can only get a loan for $300 and you pay a fee of $45. You come back in a few weeks and pay the $345.

But what if you need another loan soon? You can bring the same item back in, get the same loan, and pay the same fee. You already own the iPad, but you keep paying for it, in the form of pawn shop loan fees.

Some pawn shops also offer extensions and renewals, so it’s easy to get caught in a cycle where you don’t fully repay the loan, but you keep paying fees to renew the loan and avoid losing your item. If you find yourself caught in such a cycle, it could be time for changes to your finances.

Alternatives to pawn shop loans and personal loans

Pawn shop loans and personal loans aren’t your only options. If you have a little more time, or access to other resources, you might be able to pay less overall:

  • Introductory 0% balance transfer credit card: Consider opening a new credit card and transferring a balance to the card in order to reduce your total interest paid. Some of these credit cards also feature 0% purchase APRs, allowing you to make purchases interest-free during the introductory period. Just make sure to pay off the debt before the regular APR kicks in.
  • Home equity loan: If you have built up equity in your home, you can borrow against it. With your equity as collateral, it’s possible to get more favorable terms. However, it could take more than two weeks to get your money, and if you don’t make payments, you could potentially lose your home.
  • Payroll advance: Some employers will offer you a small loan based on your pay amount. Fees and rates are usually lower than what you’d see with a payday loan. Additionally, some services, like Earnin, helps hourly workers get advanced payment for between $100 and $500 — without charging you a fee (although you can leave a “tip”).
  • Sell an item: Rather than pawning an item, you might be better off selling it. Consider which items might be worth selling. It will take longer, but you could get a better price. Using local resources, like online Classifieds, Craigslist, and Facebook groups could also help you move quickly.
  • Community resources: Check to see if your community has emergency resources designed to help. A local nonprofit or religious group might be able to connect you with low-cost loans, or help paying bills. You might even see if family members can help.

It’s never fun to be caught without the resources to pay a bill or cover an emergency. However, there might be options that help you get through your temporary difficulty without the high cost that comes with pawn shop loans and other types of fast-cash loans.


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