There are moments when we are faced with unexpected financial obligations. This can be in the form of bills, medical expenses, or even your kid’s tuition. In these situations, you’ll have very few options; One of them being to borrow from a pawn shop. But before you consider taking a pawnshop loan, you should read this article to understand what it entails and how pawning works.

What Is a Pawn Shop?

A pawn shop is a business which provides short-term borrowing against collateral. Most pawn shops are just like regular shops where they sell new or used items. The item you use as collateral has to be valuable to cover the amount being borrowed.

Pawn shop brokers prefer items that can be easily disposed of as collateral. That way, if you are unable to pay back the loan, they can sell it off to recoup the loan amount. Most pawnshops accept household items and valuable assets like jewelry, collectibles, electronics, coins, etc. Others offer large loan amounts similar to how title loans work and take more expensive things like cars, motorcycles, and boats as collateral.

How Pawnshop Loans Work

Pawn shops have been around for decades. The concept is the same as bartering goods that existed centuries ago. The process of getting a pawn loan is very straight forward. You first have to present the item you want to use as collateral to the pawnbroker, and they would access it and offer you a loan based on the worth of the item. The amount you get would usually be a fraction of the value of the item or below 50 percent of its value. 

So, for instance, if you use a television as your collateral, you would get an amount that is below 50% of the value of the TV. This is done to compel borrowers to repay their loan. Also, some items are difficult to sell, so even if the borrower refuses to repay the loan, the item may remain in the pawn shop with no one to buy it. The pawn shop owner considers all these when assessing the amount that can be borrowed with an item. This process is called pawning. 

A period is fixed within which you are expected to repay the loan amount. The repayment period varies among lenders and states. It’s common for the term to be within 30 to 90 days. After you have fully repaid the loan, the collateral would be returned to you. You’ll also be required to pay interest, which could be as low as 2%. Some pawnshops also charge fees on the loans.

The value of the collateral is what determines the amount you get from a loan. It can range from a hundred dollar to a few thousand. The terms of the loan are written on the ticket.

Some pawn shops also accept used goods to sell. They give a fraction of the item’s value to the borrower to meet up their needs until the item is sold. The profit from the sales is then shared between the pawnbroker and the borrower. 

Illustrating a Pawn Shop Deal

To demonstrate a pawn shop loan, let’s assume you want to borrow some money with a piece of jewelry worth $500. Upon presenting the item, the pawnshop may only be willing to give you a $70 loan. In addition to the money, you will then be providing a ticket indicating the item pawned; jewelry, the amount of the loan; $70, the fees, and the repayment period; 30 days. 

You are expected to fully repay the loan amount and the accrued interest to get back the collateral before the 30 days period expires,

Other Things You Should Know About Pawnshop Loans

It doesn’t affect your credit score

Pawnshops do not report your loan to the credit bureaus, so your credit score isn’t impacted by the repayment. However, you stand to lose your property if you fail to pay the loan within the specified period.

They are legal

Pawn shops are legally approved businesses licensed by the government. Some strict rules and regulations are guiding the operations of pawn shops. These rules differ across various states. A part of the regulations outlines items that can be pawned and the percentage of the market value for which the item can be pawned. It is advisable to only deal with licensed pawnshops.

Pawnshops loans differ from payday loans

Payday loans are short term loans that are only available for people with regular paychecks. You have to show proof that you are working to access this loan, and they also consider your credit score. Pawnshop loans, on the other hand, are available to everyone of legal age that can provide acceptable collateral.

Pros and Cons of Pawnshop Loans

Everything that has benefits also has disadvantages, and a pawns loan is no exception. Below are the pros and cons of a pawn loan.

The Pros

  •   No credit requirement: As highlighted earlier, pawn shop lenders don’t consider your credit score when assessing your loan application. This is because it’s a secured loan with collateral that can be easily traded.
  •   The approval rate of pawn loans is speedy. Once you provide the collateral and an amount is agreed, you will be given the loan without much ado. 
  •   You get your item back: You only need the item to get the loan. After completing the loan repayment, your possession will be given back to you. So, in essence, you only paid the money on interest and fees.  

The Cons

  •   The pawnbroker can inflate the interest rate (APR).
  •   You get a minimal amount for items of great value.
  •   You can lose your item if you are unable to repay the loan within the fixed period.
  •   It doesn’t increase your credit history. As pawn loans aren’t reported to the credit bureaus.