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Are Pawn Shop Loans a Good Idea?

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Pawn shop loans give you access to quick cash in exchange for jewelry, electronics or other valuable items in your possession. However, this can be a risky solution for your short-term financial needs, due to high fees and the risk of losing your collateral.

Here’s what you need to know to make the best decisions for your finances.

How pawn shop loans work

Every state has its own set of laws and regulations regarding pawn shops, but the process of securing a pawn shop loan is usually the same. Borrowers bring in property and leave it behind as collateral in return for cash. There is no credit check, application or income verification required. Proof of purchase or some other indication that you own the item may be needed.

Pawn brokers won’t give you the full value of your item. In many cases, you will receive a percentage of the item’s value, but that depends on the pawn shop owner and whether they believe the item could be sold for a decent 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 if the pawn shop is willing to pay between 25% to 60% of the item’s value.

What are the best items to pawn?

 Electronics (current or in-demand)

  Firearms

  Jewelry

  Musical instruments

  Camera equipment (especially digital)

Once you take out a pawn shop loan, you will have 30 days to a few months, depending on your state, to repay the loan. You’ll be given a ticket to present when you retrieve your property after repaying your loan.

Borrower beware: If you don’t repay your loan, the pawn shop will resell your item, which is reportedly the case with about 15% of borrowers who take out pawn loans. However, if you fail to repay the loan, it won’t be reported to the credit bureaus and legal action won’t be taken against you.

Pros and cons of pawn shop loans

Pros

  No negative impact to your credit score: If you don’t repay the loan, you’ll lose the item you used as collateral, but the lack of repayment won’t be reported to the credit bureaus so your credit score won’t be impacted.

  Easy to qualify: If you don’t qualify for traditional types of loans, you may have an easier time qualifying for a pawn shop loan.

  Quick access to cash: Because you don’t need to go through a credit check or income verification for a pawn shop loan, you may receive your funds much more quickly than you would with a traditional loan.

Cons

  Loss of collateral: If you’re unable to repay the loan, you may lose the item you used as collateral. This is why it may be wise not to put down any items you’re not comfortable losing should you not repay the pawn shop loan.

  High interest costs: Pawn shop loan interest and fees can be expensive. Interest can run anywhere from 12% to 240%. This can make repaying the loan challenging for some borrowers.

  Small loan amounts: The average amount of a pawn shop loan is $150, according to the National Pawnbrokers Association. Your pawn shop loan can be for a higher dollar amount if you bring in a more valuable item. If you’re struggling financially, a pawn shop loan may not be the answer for you because the loan size may not be large enough to meet your financial situation. In this case, you may want to consider other methods to address your financial challenges, such as a small personal loan.

How pawn shop loan collateral works

When you take out a pawn shop loan, you’ll need to provide valuable collateral, such as jewelry or electronics. The pawn shop will appraise the item and determine the size of your loan based on its value. You may have to provide proof that the item belongs to you.

You’ll be given a pawn ticket that will detail the specifics of your pawn shop loan, such as the repayment terms, interest rates, fees and any other important information. You’ll want to hold on to this ticket so you can reclaim your collateral once you’ve finished paying off the loan.

If you’re unable to repay the loan, the collateral will belong to the pawn shop. They may attempt to resell the item to recoup their losses.

Pawn shop loan requirements

While traditional personal loans require things like credit checks, income verification and financial documentation, pawn shop loans require none of these procedures. You will need to present a valuable piece of collateral, a valid ID and your contact information.

Because you can skip the processes involved with securing a personal loan, you may be able to receive funds more quickly. Pawn shops don’t require credit checks or report to credit bureaus, so taking a loan out won’t impact your credit (for better or worse). However, if you’re trying to build your credit, a pawn shop loan may not be the route for you.

When it may make sense to take out a pawn shop loan

When dealing with small financial emergencies that don’t require a high-dollar amount, a pawn shop loan could work if you’re comfortable with the high fees and short repayment period.

For example, imagine you need to cover an expense no more than $200 but you don’t have the cash in your bank account. If you have a clear plan of repayment and even a backup option, then there is little risk that you will fall behind on payments and lose your item. In this case, a pawn shop loan could be a safe option.

5 alternatives to pawn shop loans

If you need fast access to cash, the following options can be more affordable:

Pawn shop loan alternatives

ProsCons
Sell an item

  No application or documentation required

  Access to local, domestic and international buyers

  Buyers may try to negotiate a lower price for the item

  You will lose ownership of the item

Credit card

  Credit building

  May earn rewards on purchases

  High interest rates

  Potential annual fee

Payday advance app

  Fast funding

  Access to cash on a rolling basis

  Advance maximum applies

  Short repayment term

Personal loan

  Flexible borrowing amounts

  Long repayment terms to choose from

  Interest charged on loan

  Origination fee may be charged

Community resources

  Fast, timely assistance

  Repayment not required, depending on type of assistance

  Limited availability of funds

  Strict eligibility requirements

Rather than pawning an item, you might be better off selling it. Consider which items might be worth selling. It may take longer, but you could get a better price. Using local resources, like online classifieds, Craigslist and Facebook groups could also help you move your item quickly.

Credit card

A credit card can help you cover expenses until your next payday if it has a high enough limit. And if you pay off your balance in full by the due date, you can avoid interest charges, which tend to be high on credit cards. It’s fair to say, however, that the APR on a credit card will be comparatively lower than the fees charged on a pawn shop loan.

Payday advance app

With payday advance apps, you can access your pay the same day you work. Earnin, for example, allows you to cash out up to $500 per pay period, with a daily cash out limit of $100. Before you cash out, it verifies your direct deposit and pay schedule, and on your next payday, your account will be automatically debited for the amount you were advanced. Earnin does not charge users any fees, but other payday advance apps may assess a fee.

Personal loan

Banks, credit unions and online lenders offer secured and unsecured personal loans in varying amounts. This option does come with additional fees and interest that must be paid in addition to the principal loan amount. However, a personal loan could be a better option because borrowers may have access to low interest rates and longer repayment terms.

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 may even help pay your bills.

What to do if you’re feeling stuck in debt

If you’re struggling with debt, a pawn shop loan may not be the right answer for your current situation. Here are a few approaches you can take if you find yourself facing challenging times because of debt:

CREATE A BUDGET

Putting together a budget can help you understand your cash flow as well as how to best work toward your financial goals. There are several actionable steps you can take that can make your debt more manageable and provide you with a better understanding of where to put your money.

FOLLOW A DEBT MANAGEMENT PLAN

If you’re unsure of how to best tackle your current debts and don’t feel that taking out a loan is right for you, consider following a debt management plan. Plans like the debt snowball method or the debt avalanche method can provide a pathway to better debt management, and may even help you pay your debt down faster.

SEEK CREDIT COUNSELING

A debt counseling service can also help you to gain a better grasp on your personal finances and how to pay off your debt. This may be an especially helpful route if you have a tight budget, as many credit counseling services are nonprofits and either don’t charge for their services or come at a very low cost.

Pawn shop loans: FAQ

Do pawn shops offer loans?

Yes — some pawn shops offer secured loans, meaning you’ll have to offer them an item of value in exchange for a lump sum of money. This can range from jewelry to electronics. If you pay back the loan, you can retrieve your item, but if you’re unable to repay the loan, the pawn shop will keep the item and sell it off. Pawn shops do not have credit score requirements and don’t report to the credit bureaus.

Is it safe to take a pawn shop loan?

While pawn shops are regulated, predatory and illegal practices still occur. However, when this happens, the Consumer Financial Protection Bureau (CFPB) can take action. For instance, in 2021, the CFPB filed a lawsuit in Texas against two companies taking advantage of military families and violating the Military Lending Act.

If you’re interested in taking out a pawn shop loan, it can be in your best interest to proceed with caution and thoroughly research companies. You may want to consider alternatives as well.

What happens when I pay off a pawn shop loan?

When you pay off a pawn shop loan, you will receive back the item you used as collateral to get the loan in the first place. However, because pawn shops do not report repayments to the credit bureaus, you won’t see a boost in your credit score for paying off this loan. If you’re seeking to improve your credit score, this may not be the route for you.

What happens if I don’t pay back a pawn shop loan?

If you’re unable to repay a pawn shop loan, the company will not take legal action against you or try to collect the remainder of your loan. Instead, they will keep the collateral you gave them and attempt to sell it to recoup their loss. Since pawn shops do not report to credit bureaus, you also will not see any negative impact on your credit score.

 

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