How Do Pawn Loans Work

Going to a pawn shop is a good idea if you want to purchase a diamond necklace for a fair price. Selling to a pawn shop, however, is an entirely different matter.

Pawn shops exchange your possessions for cash loans in addition to selling a wide range of engagement rings, broken musical instruments, mismatched tools, and outdated technology.

The way pawn shop loans operate is as follows: When you bring in an item as collateral, the pawnbroker will assess its value, give you a loan based on that cost, and hold onto your collateral until you have repaid the loan. In essence, it is a method for obtaining a personal loan without having a credit check.

The Appeal of Pawning

Everyone has been in this situation at some point: Payday is still weeks away, but you need money now. You don’t qualify for any of those cash back credit cards because of your poor credit, and your bills were due yesterday. Even though it might seem convenient to visit a pawn shop with the pearl necklace you inherited from your grandmother and apply for a loan, is the trouble really worth it?

You run the risk of losing the item you left with the pawnbroker with pawnshop loans.

That could result in a significant loss for you depending on the collateral you put up. If you’re a freelancer who uses their laptop as collateral, for instance, you might not be able to find work if you can’t afford to repay your loan. You may regret not repaying that loan for the rest of your life if you give up something sentimental, such as a family heirloom.

In theory, getting a loan from a pawn shop might make sense, but in reality, it can be expensive and risky. If you’re thinking about getting a no-credit-check loan from a pawn shop, do yourself a favor and learn about the risks first. Here are five reasons why you might want to avoid giving your possessions to a pawnbroker.

Pawn shops loan amounts

During the 2019 U.S. government shutdown, The New York Times reported on a pawn shop in Alexandria, Virginia that was only able to give a family dealing with the repercussions of the furlough $75 in exchange for their 60-inch, high-definition, flat screen television. They were hoping to get at least $200 for the trade.

Even if the item you are pawning is worth more than the loan amount, pawnbrokers typically give out small amounts. If the necklace your grandmother gave you is worth $800, it’s unlikely that you will be approved for an $800 pawnshop loan. In fact, the majority of pawnbrokers will only grant you a loan for a small portion of the value of your item; according to the National Pawnbrokers Association, the typical loan at a pawnshop is $150.

Imagine you took out a $100 loan and pledged your brand-new iPad as collateral, but you were unable to make the repayments on time. Unless it was made out of balsa wood and spray paint, your device probably cost quite a bit more than $100 when you first bought it.

The cost to benefit ratio

Before the loan term expires, you must repay the loan in full, along with interest, if you want to get your item back. Depending on the state, pawnbrokers may charge varying amounts of interest and fees, some of which can be quite high.

You will pay your pawn broker more money to recover an item that you have already purchased as your loan term lengthens. Think about that iPad again for a moment. You paid $700 to buy it. Then you pawned it for $100, and before you could get it back, you had to pay the pawnbroker $115. You’ve now paid more than the iPad’s original cost.

You might even be given the chance to extend or renew your pawn loan, but keep in mind that the more you pawn something, the more you will eventually have to pay for it.

You could lose your belongings

While the National Pawnbrokers Association estimates that nearly 80% of all pawn loans are eventually paid back, there are places in the country where the pickup rate for pawned items is far lower. That means many people who give up their belongings for quick cash are not able to get them back. Ask yourself: Is it worth risking sentimental family heirlooms for a small cash loan?

Some pawnbrokers operate illegally

The majority of states have tightened up the laws governing pawn shop loans, but that doesn’t mean all pawnbrokers are abiding by them. There have been numerous reports in recent years of pawn shops overcharging customers, getting them to sign unlawful contracts, and misleading them about the true cost of their loans.

In fact, in January 2017, the U.S. Consumer Financial Protection Bureau accused three pawn shops in Virginia’s Fredericksburg area of operating outside the law. An article from said the companies in question “understated the annual interest rates on their loan contracts by as much as half, according to three separate lawsuits filed in the U.S. District Court for the Eastern District of Virginia.”

Virginia Attorney General Mark Herring then filed a lawsuit against the pawn shops, and two out of three of them reached a settlement in March 2017 by agreeing to pay more than $62,000 in refunds to more than 1,000 former customers.

There are better alternatives

If your options are limited and you find yourself in a tight personal finance situation, it might seem like you must take out a pricey pawn shop loan. But you’re worth more than a loan from a pawn shop, and you probably don’t have to accept it.

Online personal installment loans, which are a more intelligent substitute for other loans and may be available to borrowers with bad or no credit, may be eligible for even those. For a variety of reasons, personal installment loans might be preferable to other options:

  • First, they can help improve your credit, as on-time payments are typically reported to the credit bureaus.
  • Unlike with payday, title or pawn shop loans, installment loans typically have longer terms and set payment that you can actually afford.
  • You’ll know before you sign any contract how much you have to pay every month and how long it will take to pay off the loan.
  • Don’t risk losing your precious property. Before you sign up for a pawn shop loan, do your research and choose a strategy that will benefit your family and your finances.

    On April 26, 2018, and again on December 14, 2019, this blog post was updated.

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    How does a loan from a pawn shop work?

    When you go to a pawn shop to borrow money, you put up something as collateral—like jewelry, a TV, or a musical instrument—and the shop gives you a loan based on the item’s estimated value. The pawnshop may keep your collateral and sell it to recoup their losses if you don’t repay the loan as agreed.

    How much can you borrow from a pawn shop?

    With an average loan of $75 to $100, you’ll typically walk away with between 25% and 60% of the value of the item you pawned. You can get your item back if you repay the loan within a certain time frame.

    Do pawn loans affect credit?

    Pawn shop loans have both advantages and disadvantages. On the plus side, your credit score won’t be negatively impacted if you default on the loan because the failure to repay won’t be reported to the credit bureaus.

    Can you pay off a pawn loan early?

    You must return to the pawnshop to pay off the loan within the specified time after receiving the loan, so be sure to do so. If you follow these instructions and pay the full amount, they’ll return your item. The typical term of pawn loans is three to four months, but yours may be longer or shorter.