The Dangers of Pawnshop Loans and Alternatives to Save You Money

Advertiser Disclosure

Student Loan Hero Advertiser Disclosure

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.

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.

Interested in a personal loan?

Here are the top personal loan lenders of 2018!
LenderRates (APR)Loan Amount 
1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Personal LoansFixed rates from 5.49% APR to 14.24% APR (with AutoPay). Variable rates from 5.365% APR to 13.365% APR (with AutoPay). SoFi rate ranges are current as of April 11, 2018 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. See APR examples and terms. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 5.365% APR assumes current 1-month LIBOR rate of 1.88% plus 3.735% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.
  2. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)

2 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  1. Personal Loan Rate Disclosure: Fixed interest rates range from 4.99% – 16.24% (4.99% – 16.24% APR) based on applicable terms. Lowest rates shown are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment Discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  2. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with us at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  3. Automatic Payment Discount: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their Citizens Bank Personal Loan during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account two or more times within any 12-month period, the borrower will no longer be eligible for this discount.
7.73% - 29.99%$1,000 - $50,000
Check rate nowon SLH's secure site
5.37% - 14.24%1$5,000 - $100,000
Check rate nowon SLH's secure site
8.00% - 25.00%$5,000 - $35,000
Check rate nowon SLH's secure site
4.99% - 16.24%2$5,000 - $50,000Visit Citizens
5.99% - 35.89%$1,000 - $40,000Visit LendingClub
5.25% - 14.24%$2,000 - $50,000Visit Earnest
Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.