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Pawnshop Loan: What Is It & How Does It Work?

By Austin Kilham · September 29, 2022 · 5 minute read

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Pawnshop Loan: What Is It & How Does It Work?

If you’re strapped for cash and have a hard time qualifying for traditional loans, or you live in an underbanked area, you may be considering a pawnshop loan. They appear to be a convenient option — consider that there are 10,000 pawn shops currently operating in the country — but they can also come with significant disadvantages, including high fees.

Before putting your valuables down in pawn, learn more about what pawnshop loans are and how they work.

What Is a Pawnshop Loan?

A pawnshop loan is a secured, or collateralized, loan. To borrow the money you must produce an item of value as collateral – such as a piece of jewelry, a musical instrument, electronics, or an antique – that provides backing for the loan. You and the seller agree to a loan amount and a term. If you don’t pay back the loan within the agreed amount of time, the pawnshop can sell the item to recoup the amount of the loan.

Pawnshops will typically offer you 25% to 60% of the resale value of an item. The average size of a pawnshop loan is $150 over the course of 30 days.

Aside from the need for collateral, there are few other requirements to qualify for a pawnshop loan. You typically don’t need to prove your income or submit to a credit check.

Recommended: Loans Based on Income

How Do Pawnshop Loans Work?

Pawnshops don’t charge interest on the loans they offer. However, the borrower is responsible for paying financing fees that can make the cost of borrowing higher than other loan options.

Regulations around what pawnshops can charge vary by state, but you could end up paying the equivalent of many times the interest charged by conventional loans.

Say you bring in a $600 guitar to a pawnshop, and they offer you 25% of the resale value, or $150. On top of that, let’s say the pawnshop charges a financing fee of 25%. That means you’ll owe $37.50 in financing fees, or $187.50 in total.

If you agree to the loan, the pawnbroker will typically give you cash immediately. They’ll also give you a pawn tick, which acts as a receipt for the item you’ve pawned. Keep that ticket in a safe place. If you lose it, you may not be able to retrieve your item.

You’ll usually have 30 to 60 days to repay your loan and claim your item. According to the National Pawnbrokers Association, 85% of people manage to do this successfully. When a borrower pays off a pawnshop loan, they can retrieve the item they put in pawn. For those who don’t, the pawnshop will keep the item and put it up for sale. There is no other penalty for failing to pay off your loan, but you do lose your item permanently.

Recommended: Can You Get a Loan Without a Bank Account?

The Pros and Cons of Pawnshop Loans

In general, it’s best to seek traditional forms of lending, such as personal loans, if you can: They tend to be cheaper and help you build credit. However, if you need cash the same day and you don’t qualify for other loans, you might consider a pawnshop loan. Carefully weigh the pros and cons to help you make your decision.

Pros of a Pawnshop Loan

•  Access to cash quickly. When you agree to a pawnshop loan, you can typically walk out with cash in hand immediately.

•  No qualifications. The ability to provide an object of value is often the only qualification for a pawnshop loan.

•  Failure to pay doesn’t hurt credit. While you will certainly lose the item that you put in pawn if you don’t pay back your loan, there are no other ramifications. Your credit score will not take a hit.

•  Loans aren’t sent to collections. If you don’t pay back your loan, no collections agency will hound you until you pay.

Recommended: How Do Collection Agencies Work?

Cons of a Pawnshop Loan

•  High fees. The financing fees associated with pawnshop loans can be much more expensive than traditional methods of obtaining credit, including credit cards and personal loans. Consider that the average interest rate on a personal loan is 9.41% as of February 2022, according to the St. Louis Federal Reserve, whereas pawnshop financing fees could range from 12% to 240% or more.

•  Loans are relatively small. The average size of a pawnshop loan is just $150. If you need money to cover a more costly expense, you may end up scrambling for cash elsewhere.

•  You won’t build credit. Pawnshop loans are not reported to the credit reporting bureaus, so paying them off on time doesn’t give you credit score a boost.

•  You may lose your item. If you can’t come up with the money by the due date, you’ll lose the item you put in pawn. (Same if you lose your pawn ticket.)

Pros and Cons at a Glance

Pros

Cons

Quick access to cash. Financing fees can range from 12% to 240% and contribute significantly to the cost of the loan.
No qualifications, such as credit check or proof of income. Pawnshop loans aren’t reported to the credit reporting bureaus, so they won’t help you build credit.
Failure to pay doesn’t hurt credit. If you fail to pay back your loan on time, or you lose your pawn ticket, you can’t reclaim your item.
Loans can’t be sent to collections. Loans are relatively small, just $150 on average.

What Is a Pawnshop Title Loan?

A pawnshop title loan is a loan in which you use the title of your car as collateral for your loan. You can typically continue driving your vehicle over the course of the loan agreement. However, as with other pawnshop loans, if you fail to repay your loan on time, the pawnbroker can seize your car.

Typical Requirements to Get a Loan Through a Pawnshop

There are typically few requirements to get a pawnshop loan, since the loan is collateralized by the item you put in pawn and the pawnbroker holds on to that item over the course of the loan. However, pawnbrokers do want to avoid dealing in stolen goods, so they may require that you show some proof of ownership, such as a receipt.

Alternative Loan Options

There are a number of benefits of personal loans that make them a good alternative to pawnshop loans. Personal loans are usually unsecured, meaning there is usually no collateral for a personal loan. Lenders will typically run a credit check, and borrowers with good credit scores usually qualify for the best terms and interest rates. That said, some lenders offer personal loans for people with bad credit.

If you qualify for a personal loan, the loan amount will be given to you in a lump sum, which you then repay over a course of monthly installments. The money can be used for any purpose.

Personal loans payments are reported to the credit reporting bureaus, and on-time payments can help boost your credit score.

The Takeaway

If you only need a small amount of money, you don’t qualify for other credit, or if you’re looking for a loan without a bank account, you may consider a pawnshop loan. Just beware that they are potentially costly alternatives to other forms of credit.

Consider a personal loan option from SoFi, which offers a low fixed rate for those who qualify.

Compared with high-interest credit cards, a SoFi Personal Loan is simply better debt.

FAQ

How is a loan obtained through a pawnshop?

To borrow money from a pawnshop you must present an item of value that can act as collateral for the loan. The pawnbroker may then provide a loan based on the value of that item.

What happens if you don’t pay back your pawnshop loan?

If you fail to pay back your pawnshop loan on time, you won’t be able to reclaim your item, and the pawnshop will sell it to recoup their losses.

What’s the most a pawnshop loan will pay?

On average, a pawnshop will loan you about 25% to 60% of an item’s resale value, and the average pawnshop loan is $150 over 30 days.


Photo credit: iStock/miriam-doerr
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