Should You Take a Pawnshop Loan?
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Payday lenders, title lenders and pawnshops all market their services to borrowers who lack other options for fast cash. Of the three, pawnshop loans are usually the least harmful.
Interest rates on pawnshop loans vary by state and typically are presented as fees, but it’s more useful to compare loans in terms of annual percentage rate. While payday loans and car title loans can easily top 400% APR, pawnshop loans may be more affordable, with APRs around 200%.
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How pawnshop loans work
All pawnshop loans follow a similar structure: You provide an item as collateral, the shop assesses its value and offers you a loan. You then repay the loan, with interest, to get the item back.
Like with any loan, it pays to compare offers because one pawnshop may give you a better deal than another.
Borrowing a pawn loan
To get a pawn loan, you go to a pawnshop with something you own that you’re willing to leave as collateral. Items you can pawn vary by store and location and may include jewelry, firearms, electronics, collectibles, tools and musical instruments.
The staff assesses the item’s value, condition and resale potential, then decides whether to offer a loan.
Nolo.com, a website that answers legal questions, estimates pawnshops will lend you about 25% to 60% of resale value. Quotes can vary substantially, so compare offers from multiple pawnshops to find the best one.
Because you’re leaving collateral with the lender, a pawn loan doesn’t require a credit check, but you must be 18 years or older and show proof of your identity. Pawnshops are in regular contact with law enforcement to avoid dealing in stolen goods, so the shop may require proof of purchase or ownership of the item.
If you accept a loan, you walk away with the cash and a pawn ticket, which you’ll need to get your item back. You can take a photo of the ticket as backup in case you lose it.
Repaying a pawn loan
When it’s time to pay the loan back, usually 30 to 60 days, you return to pick up the item and pay off the loan (plus fees and interest). Fees vary by state and can include insurance and storage charges.
If you can’t repay within the original term, you may be able to extend or renew the loan. If you can’t repay the loan, the pawnshop sells your item to get its money back.
The average pawnshop loan is about $150 and is repaid in about 30 days, according to the National Pawnbrokers Association.
Know the risks: Because pawnshop loans have high rates and short repayment terms, they’re best reserved for urgent, one-time expenses. Though they can be less expensive than payday and some other high-cost loans, borrowers still risk relying on pawnshop loans — a cycle of debt that’s difficult to break.
Pros and cons of pawnshop loans
Pros of pawnshop loans
No credit check: Pawnshop loans may appeal to consumers who can’t qualify for a conventional loan, since they don’t require a credit check.
Quick access to funds: With a pawnshop loan, you get the money right away, so you don’t have to wait for funding like a traditional personal loan.
Failure to repay only results in losing the pawned item: There’s no legal requirement to repay a pawnshop loan, so your credit score won’t suffer if you don’t repay, nor will you be harassed by debt collectors or sued. The only consequence is losing your item.
Cons of pawnshop loans
High cost to borrow: The biggest downside to pawning is the cost. Consumer advocates consider an APR of 36% to be the upper end of affordability for any loan. A pawnshop loan of $100 that costs $10 in fees and is due in 30 days runs about 122% APR.
May lead to repeat borrowing: About 15% of pawn loans are never repaid, according to the National Pawnbrokers Association, and repeat customers are common.
Won’t solve deeper financial issues: If you find yourself reborrowing or extending a pawn loan, or pawning and redeeming the same item repeatedly, you may need more than this short-term financial patch.
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Pawn loan APR calculator
The best way to find out if one loan is more affordable than another is to calculate the annual percentage rate. APR provides the best apples-to-apples cost comparison across all types of loans and credit cards.
If a pawnshop does not disclose an APR — many only list fees, or give interest per month rather than year — use the calculator below to find the APR.
» MORE: 19 ways to find fast cash
Alternatives to pawnshop loans
Before going to a pawnshop, consider more affordable alternatives. Most of these options can deliver funds within a few days.
» MORE: Alternatives to high-cost loans
Selling: If you’re willing to part with the item you’re pawning, consider selling it to a pawnshop or private buyer. A private buyer will likely pay more than a pawnshop, but it may take longer. Either way, a sale will likely net more than a pawn loan.
Payday alternative loans: A payday alternative loan, or PAL, is a type of small loan offered by federal credit unions that caps the cost of borrowing, so it’s easier to repay. You’ll need to become a member of the credit union before applying for a PAL.
Small-dollar loans: Mainstream banks like Wells Fargo, U.S. Bank and Bank of America offer short-term, small-dollar loans to existing customers. These loans will likely cost less than a pawn loan, but you may have to undergo a credit check. You can also get a small-dollar loan from an online lender.
» MORE: Best small-dollar loans
Bill forbearance: If you’re trying to stretch until your next paycheck, contact your utility or other creditor and see if they will extend a grace period.
Community assistance: If you need to cover rent, utilities or other necessary expenses, see if you can get financial assistance from a local agency. Charitable, religious or other community-based organizations have funds dedicated to assisting community members in these circumstances.
at Self
Cash-advance apps: Cash-advance apps like EarnIn and Dave can provide an advance on your paycheck a few days early. Look for an app that charges minimal fees or interest.
“Buy now, pay later” plans: Buy now, pay later apps break the cost of a purchase into equal installments, typically due over six weeks, with zero interest. This can stretch your dollars further for the month if you’re short on cash, but be sure to repay the installments on time.
» MORE: 19 ways to find fast cash
Breaking the debt cycle
Building an emergency fund is the best way to avoid borrowing high-cost loans, but it can seem daunting if you need cash today. Any amount of money you can save each month, whether it’s $5 or $50, will put you on the path toward building a safety net. That way, you’ll have interest-free money to rely on the next time a financial emergency strikes.
For help building a budget, finding ways to access cash and saving money contact a nonprofit credit counseling agency. These organizations offer basic budgeting and financial education services, and some services are free.
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