Pawn shop loans may seem like an easy way to get fast cash, but it’s best to read the fine print and consider the alternatives before signing on the dotted line.
Here are a few common questions that borrowers should know the answer to before pawning an item in exchange for a loan.
What Is a Pawn Shop Loan?
A pawn shop loan is a way to access cash quickly, without a lot of paperwork or credit checks. Essentially, it’s a short-term loan that’s secured with collateral — anything from jewelry to musical instruments — and the loan amount is based on a percentage of the total value of that collateral.
How do Pawn Shop Loans Work?
Here’s an example of how a pawn shop loan works:
Let’s say you need extra cash to pay a late bill this month. Your grandmother recently gave you a few pieces of her gold jewelry, so you pick two bracelets and take them to the local pawn shop – not to sell, but to use as collateral for a loan.
The pawnbroker weighs and appraises the gold, then agrees to loan you 50% of the value, or $350. The pawnbroker gives you a pawn ticket, which details the finance charge and due date — typically 30-60 days. They will then safely store your jewelry until the term is over or you pay back the loan, whichever comes first.
If you can come up with the $350 plus interest and fees before the month is over, you’ll get your bracelets back. If not, you may be able to extend the loan — with additional fees and interest attached. However, if you can’t repay the loan, the pawn shop gets to keep the two bracelets you used as collateral.
What do Pawn Shop Loans Cost?
The total cost of a pawn shop loan includes both an interest rate charge and other potential fees.
Pawn shop interest rates are regulated by the states in which they operate, and state laws can vary greatly. For example, in most areas of Massachusetts, pawn shop interest rates are capped at 3% per month. In other states, like Nevada, the cap is 13% a month. Many pawn shops also charge fees for storing and insuring your collateral.
Pawn shop interest rates are generally considered on the high side when compared with other types of loans. For example, if your $200 pawn shop loan is due in 30 days and costs $25, the annual percentage rate (APR) is 152%. For comparison, the average credit card APR is closer to 19%.
How long is a pawn shop loan repayment term?
Repayment terms for pawn shop loans are much shorter than traditional loans – usually 30-60 days. If you fail to pay off the loan in the agreed-upon timeframe, you may be able to extend the loan, but will face additional fees and interest to do so. Or worse, you could lose your collateral altogether. If you’re not completely sure you can pay back the loan on time and the collateral is of great value to you, it may not be worth the risk.
How are Pawn Shop Loans Regulated?
Pawn shops are strictly regulated and subject to many of the same federal laws and statutes as other lending institutions – including the Truth in Lending Act, the Patriot Act and the Equal Credit Opportunity Act. As mentioned above, their interest rates are governed by state law.
There are also several industry organizations like the National Pawnbrokers Association that provide oversight and resources for members, as well as borrowers looking for a reputable pawn shop in their area.
Do Pawn Shop Loans Affect Your Credit Score?
Because pawn shops use your valuables as collateral, they don’t need to run a credit check to determine your creditworthiness. If you default on your loan, you’ll lose your collateral, but it will not negatively impact your credit report or credit score as a result.
However, because pawn shops do not report payments to credit bureaus, unlike a traditional installment loan, you are not going to see an improvement in your credit score after you pay back a pawn shop loan.
What Are Some Pawn Shop Loan Alternatives?
While pawn shop loans may sound appealing with their easy access to quick cash, the high fees, and the possibility of losing your collateral make them an expensive and risky option. Personal loans, lines of credit, and even credit cards can offer advantages over pawn shop loans.
1. Personal loans
A personal installment loan can be more affordable than a pawn shop loan, and since personal loan lenders typically report to credit bureaus, it can also help build (or rebuild) your credit history. Many personal loans offer lower interest rates and a longer repayment period, and most require no collateral.
2. Line of credit
A personal line of credit is similar to a credit card. After approval, you have access to a line of credit and can request cash advances as needed up to the maximum amount. When you pay back what you borrowed, that amount is added back to your available credit. A personal line of credit can be a good tool for people with fluctuating income who need to cover small gaps between paydays — but know they’ll be able to repay the advances within a month or two at the most.
3. Credit cards
Paying bills with your credit card isn’t usually the best option, but in a pinch it can help you get to your next payday if your credit limit is high enough. You’ll also benefit from a lower APR than you’d be charged at a pawn shop, without having to risk losing your collateral in the process.
4. Payday alternative loans (PALs)
If you’re a credit union member, you may be able to take advantage of a Payday Alternative Loan (PAL). Similar to payday loans, PALs are small dollar loans with short repayment terms, usually one to six months, and don’t always require good credit. They do, however, require proof of income and employment. The National Credit Union Association makes it easy to find a credit union in your area.
Personal loans from RISE
While there are many lenders in the marketplace today, RISE is different. We focus on helping hard-working people like you take control of your personal finances and make lasting improvements to your financial future. RISE offers a simple online application and, if approved, you may be able to receive funds in your bank account as soon as the next day.*
No matter what kind of challenges life throws at you, tomorrow’s looking up with RISE.
This content provided is for educational and informational purposes only and does not constitute financial or legal advice. RISE is not acting as a credit counseling or repair service, debt consolidation service, or credit services organization in providing this content. RISE makes no representation about the reliability or suitability of the information provided – any action you take based on this content is at your own risk.
*Applications processed and approved before 6pm ET are typically funded the next business day. RISE is offered only to residents in states where permitted by law. To obtain credit, you must apply online and have a valid checking account and email address. Approval for credit and the amount for which you may be approved are subject to minimum income requirements and vary by state.