Are pawn shop loans worthwhile? – Forbes consultant

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If you need cash quickly and don’t have the funds to get a good personal loan, you may be considering alternative loan products. These are things like payday loans, auto title loans, and pawn shop loans.

Neither of these products are particularly good, and it is best to use them as a last resort. But if you had to choose one, pawnshop loans are the least damaging financially, as they cannot affect your creditworthiness. However, they are not resilient and have their limits.

What is a pawn shop loan?

A pawn shop loan is a type of secured loan, meaning it is backed by collateral. In this case, that’s the farmer – the item that you bring in and leave the pawnbroker. If you repay the loan on time, you will get your farmer back. If you don’t, the pawnbroker can keep the farmer and put him up for sale in his shop as payment for the loan.

As long as you have something of value, pawn shop loans have no other qualification requirements. That is their strength; Unlike other loans that are all about checking your income and credit, you could go to a pawnshop with no income and no credit and still get a loan.

In fact, pawnshop loans are one of the oldest forms of lending for this very reason. After all, our ancestors didn’t have FICO scores or pay stubs to prove their creditworthiness to lenders, so they used such a collateral-based system.

How do pawn shop loans work?

First you find something of value and take it to the pawn shop. Remember, it has to be something with a high resale value that can be easily sold to the general public. Your book collection may have cost you a lot, but it is unlikely that the pawnbroker can get much for it, for example. Popular peasant items include jewelry, power tools, firearms, musical instruments, and electronics.

The pawnbroker will ask questions about your farmer to assess its value and make sure you actually own it (thieves often use pawn shops to turn stolen items into cash). Then they’ll ask if you want to sell or mortgage it.

When you mortgage it, they offer you a loan based on its value. Typically, you can expect a loan of 25% to 60% of the resale value (Important: The resale value is usually much lower than what you paid for the item when it was new!). In addition, pawn loans have a financing fee instead of an annual percentage (APR) and can be very expensive. Regulations vary widely by state, but if you do the math, you might pay the equivalent of 13% to 1,300% of the annual interest rate. In comparison, the average personal loan calculates an interest rate of around 9.65% of the annual interest rate.

For example, let’s say your farmer has a resale value of $ 1,000. The pawnbroker offers you a loan that is 25% of its resale value ($ 250) with a financing fee of 25%. Not only do you owe $ 250 in principal, but you also owe $ 62.50 in financing fees. This means that for a $ 250 loan, you owe a total of $ 312.50.

If you take your loan, you will receive the money immediately and the pawnbroker will give you a pawn ticket, a receipt for what you have pledged. Make sure you don’t lose it as you will need it to reclaim your item later.

The pawnbroker will let you know when to return to repay the loan and reclaim your item, usually within 30 or 60 days. If you don’t return by that date, the pawnbroker will simply keep your item and put it up for sale in the store. There is no penalty for failing to pay by the due date as your collateral will then be used to repay the loan on your behalf.

When are pawn shop loans a smart move?

When you need money, it is almost always better to apply for a loan through more traditional sources. This will save you money, build up credit, and potentially access a larger amount of money when you need it. However, there are some cases where a pawn shop loan can really help you, such as:

  • You need cash right away. Some lenders offer same-day financing. But if you need money almost immediately, you can go to a pawn shop and get cash in minutes.
  • You only need a little cash. Pawn shops usually only accept small items and only offer loans at a fraction of their value. The best you can get is a few hundred dollars.
  • You have something of value that you can possibly lose. If you cannot repay the loan by the due date, you could lose your item for good. Some people lose important family heirlooms.

Advantages and disadvantages of pawn shop loans

If you are considering this type of personal loan use the list below to orient yourself. Are the positive results working for your situation? Are you able to cope with the disadvantages of pawn shop loans? If so, then you might be okay with a pawn loan.

Benefits of pawn shop loans

  • Fast financing: With the money you can leave the pawn shop in minutes.
  • Does not affect your balance: You don’t need good credit (or indeed no credit) to get a loan. And if you don’t pay, you won’t see a credit score hit.
  • No problems from creditors if you don’t pay: You will not be referred to collections or prosecuted by creditors if you fail to pay the loan. In this case, the pawnbroker simply takes ownership of your farmer and sells them to get the money back.

Disadvantages of pawn shop loans

  • Potentially expensive: Given the financing fee associated with pawn loans, they can be dramatically more expensive than a traditional personal loan. Take this into account when deciding whether this is the right financing option for you.
  • Loans are very small: According to the National Pawnbrokers Association, the average pawn loan is $ 150 and lasts 30 days. To find out how much you could possibly get for your loan, find the Resale Value of your item and multiply it by 0.25 and 0.60 – this is the range to expect.
  • You can lose your pawn: If you lose your pawn ticket, you cannot get your farmer back. If you don’t pay back the loan by the due date, you could lose your farmer too. For example, many people lose their grandmother’s wedding ring.
  • Doesn’t build credit: Since pawns are not reported to the credit bureaus, they will not help you build credit either. Without credit, you’ll find it harder to rent or buy a home, qualify for better loans and credit cards, or in some cases even get a job.

Alternatives to pawn shop loans

If you are in dire straits and can’t apply for a more traditional loan, pawn shop loans aren’t your only option. You can consider:

  • Ask for an extension. It can be stinging to ask, but when you have bills due, companies are often willing to work with you if you encounter a temporary financial bottleneck.
  • Find help from a charity. 211.org is a great resource for finding local charities that can offer temporary help, especially to disadvantaged people. The money is meant for you; Make sure to use it when it’s there.
  • To sell something. Pawn shops aren’t the only place to sell things. You can often get much better prices through Craigslist, Facebook Marketplace, OfferUp, or other marketplaces if you can wait a few days to find a buyer.
  • Sign up for a part-time job. Many sideline jobs allow you to sign up and start making money right away, e.g. B. Uber (and Uber Eats), Rover, TaskRabbit, Transcription and Mystery Shopping.
  • Find an Alternative Payday Loan (PAL). Some credit unions offer these small loans to their members. These loans help build credit and do not charge outrageous fees. Hence, they can be a great option.
  • Save emergency funds. This won’t help if you need help today, but now is a good time to think about setting up an emergency fund if you have the funds. That way, the next time you land in a rough area, you’ll have a pillow to catch you.