Is a Pawnshop Loan a Good Idea?

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Len Penzo
Is a Pawnshop Loan a Good Idea?

A pawnshop loan is a quick way to borrow funds and doesn’t require you to go through a lengthy application process like those which accompany an auto or a title loan. You’ll get the required funds right at the pawn store because there is no credit check or approval process. The loan amount is directly proportional to the value of the item used as collateral.

For instance, say you have a gold chain. You take it to the pawnshop where the pawn broker reviews the item and assigns a value to it. The funds that you receive as a loan are based on a percentage of the total value of the product.

As per the National Pawnbrokers Association, the average amount loaned is $150 and the rates as well as the amounts approved vary by state. In general, pawnshop loans offer a 30-day repayment term alongside a one-month grace period.

How Does A Pawnshop Loan Work?

A pawnshop loan is an emergency loan. It is one of the easiest loans to access as you don’t need a good credit score or to furnish heaps of documents. Most pawnshops accept everything – from electronics to gold and diamonds. Just walk into the nearest pawnshop with the item you wish to place as collateral, wait for the broker to make an offer, sign the contract, and walk out of the store with the required cash.

To get a loan, you need to show proof of identity and the purchase receipt/invoice of the item you wish to use as collateral. The shop will issue a ticket with every detail of the loan. Make sure that you keep it safe as you’ll need it to retrieve the collateral once you pay off the loan. Besides, if you lose it, the lender might add an extra charge.

On average, the repayment terms are 30 days, with an additional 30-day grace period. You’ll need to bear the upfront fee for the loan. Additionally, the APR can reach as high as 300% depending on the final amount and other expenses like insurance, storage fees, and appraisal fees as well. However, these extra charges vary by state.

Advantages Of Pawnshop Loans

Pawnshop loans are a potential option for borrowers with bad credit. If you aren’t eligible for standard loans for quick cash like a personal loan or a payday loan but have an item of value that you can use as collateral, you can access funds within an hour.

Here are some notable benefits:

  • You can easily get this loan as there is no minimum credit score requirement or a long list of documents needed.
  • The annual percentage rate (APR) is comparatively lower than standard loans.
  • Your credit score isn’t impacted even if you default on the loan.
  • The approval process is extremely quick.
  • You don’t need a co-signer or any other guarantee other than the collateral.
  • You can choose amounts as low as $150 and as high as $200,000.

Disadvantages Of Pawnshop Loans

Although the approval process is quick as easy, pawnshop loans have their share of drawbacks as well. Here are some of the disadvantages:

  • Although the repayment term is short, the interest rates on this loan can be anything between 12% to 25% or more every month, depending on the state laws.
  • You’ll be charged extra for storage, insurance, and appraisal fees.
  • If you default on the loan, the pawnshop will take possession of the collateral.
  • You will be subjected to debt collectors if you don’t make payments on time.

Alternatives To Pawning

A pawnshop loan may not be the right fit for you if you need a higher amount or aren’t comfortable with the interest rates. If you need quick cash and are looking for other alternatives, here are some options worth considering:

  • Personal Loans – Personal loans offer both collateral and non-collateral options. Depending on your situation, you can choose whichever fits the need. To get a personal loan at a low rate, you will need a stellar credit score, low debt-to-income ratio, stable income, and a strong repayment history.
  • Payday Loan – A Payday loan is a short-term loan for people with a regular income. These loans usually have higher interest rates and are mostly meant for borrowers with a poor credit score. You can borrow funds in amounts ranging between $300 to $1,000 and repay within 15-30 days.
  • Payday Alternative Loan – A payday alternative loan is regulated by NCUA. You’ll generally find a lower interest rate when compared to a personal loan or a payday loan. You can get a higher amount with payday alternative loans, usually between $200 to $1000, and the repayment terms range between 15-180 days.

If you’re stuck with poor credit and aren’t eligible for other standard options, it is always worth exploring a pawnshop loan if you have an item to pawn. However, make sure that you discuss the terms and conditions clearly with the broker before signing the contract to ensure no hidden or unexpected fees arise.