The Dangers of Pawnshop Loans and Alternatives to Save You Money

pawnshop loans

TV shows like “Pawn Stars” make pawning seem like an easy way to score quick cash for potentially valuable items in your home. While selling an item at a pawnshop is a straightforward transaction, actual pawning is more serious and complicated.

Pawning an item is essentially taking out a loan against that asset. You bring your item to a pawnshop, which gives you cash and holds on to the item until you repay the loan. But are pawnshop loans ever a good idea?

How pawnshop loans work

A pawnshop loan is a fast way to borrow money that doesn’t require the lengthy application process of a traditional loan. There’s no credit check, and you can get cash on the spot. The loan amount is based on the value of the collateral you decide to pawn.

Let’s say you have a diamond ring. You bring it to a pawnshop, where a pawnbroker assigns a value to it and offers you a loan based on a percentage of that value.

If you agree, a contract is drawn up and you’re given the cash. You’re then required to pay back that amount in full based on the agreed-upon repayment terms, which vary by state.

The average loan amount is $150, according to the National Pawnbrokers Association. Items you can pawn range from gold and diamond jewelry to electronics, musical instruments, tools, and more.

“Usually, you get about 50 percent of the value of the item in used condition,” said David Bakke of Money Crashers, a personal finance website. “A typical pawn loan may have a term length of 30 days plus a one-month grace period.”

If you can’t pay back your pawn loan in full, even after an extension, you can surrender your collateral as payment in full, according to Bakke.

Interest rates and other fees associated with taking out a collateral-based pawnshop loan also vary by state. In South Carolina, for example, the APR can range from 65.40% on a $15,000 loan to 300.00% on a $50 loan. That’s in addition to the finance charge, which ranges from $817.50 to $12.50 for those loan amounts.

You’ll be given a ticket stipulating all the conditions and fees of your loan, which you must keep to retrieve the item. Losing that ticket could mean you’ll incur more fees.

The dangers of pawnshop loans

There are two major risks when it comes to pawnshop loans. First, if you aren’t able to repay the loan amount, you can lose your collateral. You likely brought in an item of value — cost, sentimental, or both — so you could lose your engagement ring, for example, if you can’t pay.

According to the National Pawnbrokers Association, 85 percent of people ultimately redeem their items. But it’s a risk to consider.

The second, and arguably biggest, danger is the interest rates.

“The interest rate is normally the most allowed by law for any particular state, typically in the 25.00% range,” said Bakke. “But that is an interest charge you will pay each month. You have the option to redeem the loan and get your item back in the first 30 days, but if you don’t or can’t, it can end up in an unending cycle of debt, especially if what you get a loan on is of higher value.”

That’s what happened to Christine Luken, a certified financial counselor and author of “Money is Emotional: Prevent Your Heart From Hijacking Your Wallet.”

When her now ex-fiance asked her for financial help to get his best friend out of jail, she turned to a pawnshop.

“I didn’t have the cash, but I did own some jewelry that was worth something,” Luken said. “So I took my grandmother’s wedding ring to the pawnshop, where the owner gave me $150 for it on a pawn. I had to pay $30 a month in interest. I ended up paying interest on it for 24 months, $720 in total. That’s 480 percent of what I originally borrowed.”

These interest rates compound quickly, and you could end up in a similar situation if you’re not careful. So keep these costs in mind when you’re looking for some quick cash. It might not be as easy as you think.

When to consider taking out a pawnshop loan

Even with these high risks, sometimes you need cash fast. If you’re really in a pinch and have poor credit, pawnshop loans could help you out of an unforeseen circumstance.

“Pawnshop loans might be a good idea if you are out of options and need money quickly,” said Bakke. “But only if you’re 100 percent sure you can pay back the loan within the 30 days.”

Also, since there’s no credit check, you don’t have to worry about the loan showing up on your credit report. Even if you can’t pay back the loan, the shop simply will keep your collateral instead of reporting you to a credit bureau, which can be helpful for people who struggle with their credit rating.

Alternatives to pawnshop loans

Ultimately, it’s advised that you have at least a three-month emergency fund on hand so you don’t have to fret in an emergency situation. But not everyone can do that.

If you need cash in a pinch, here’s what you can do:

  • Ask for an extension on a bill: If the money problem you’re facing has to do with paying a bill, try talking to the company to see if you can get a grace period or extension. That way, you’ll avoid the astronomical interest fees of pawnshop loans.
  • Get a payroll advance: Some companies allow you to get your paycheck early if you’re in a jam. This is a great option if you have a few days to get the money you need, and you don’t have to worry about interest. The amount will be deducted from your next check.
  • Sell something: Instead of pawning an item, why not dig up something you no longer want and sell it? On websites like Craigslist, you can list your item locally and set up a meeting to sell it. Remember that you also can sell items to pawnshops, but you might not get as much.
  • Get a personal loan: If you have more wiggle room in your timeline to get cash, consider a personal loan. While you’ll need a relatively good credit score, interest rates on personal loans won’t be as steep as interest rates on pawnshop loans.

Pawnshop loans have pros and cons, but they should only ever be considered in an emergency. The costs associated with not paying the loan back on time are steep, so be sure to keep other options in mind if you’re in a pinch.

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