From time to time you may need a few extra dollars – and fast.
To help you survive, you might consider taking out a personal loan or even selling items on Craigslist and eBay. You can consider pawnshop loans as a cross between these two options, offering you the opportunity to get extra money but without losing your property.
However, while pawnshop loans may be a preferred alternative to predatory payday loansThey also have pros and cons. Read on to find out how pawnshop loans work, reasons to consider them (and reasons to stay away), alternatives, and more.
Pros and cons of a loan at a pawnshop
Like any other loan option, pawnshop loans have their pros and cons, and you should consider both options before taking them out.
Pros:
- You can quickly access cash
- No credit check required
- The terms of the loan are governed by federal and state laws.
Minuses:
- You can lose your belongings if you don’t repay the loan by the due date.
- Financing rates are much higher than traditional loans
- There are a few sketchy pawn shops out there, so you need to do your research.
How does a pawn shop loan work?
Pawnshop loans are a type of short-term secured loan, which means you get cash in exchange for some form of collateral. However, what you use as collateral can take many forms.
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You can exchange electronics or collectibles, or perhaps a tool or antique; but in the grand scheme of things, what you use as collateral doesn’t really matter as long as you repay the loan in time and with interest.
Read more: Unsecured vs Secured Loans: What’s the Difference?
As a rule, pawnshops offer from 25% to 60% of the value of the item.and you will have only 30 days, or a maximum of several months, to pay off the loan and return the goods.
These loans are available for relatively small amounts of cash, so it shouldn’t be too hard to get the money back. In fact, according to the National Pawn Shops Association (NPA), the average pawnshop loan is only $150.
However, if you are struggling to get back the amount you borrowed, you also have a second option: No repay the loan. Instead of paying interest to the pawnshop, the item you used as collateral can act as a loan payment.
Can I get a loan from a pawnshop?
Movies and TV shows have made pawnshops suspicious and suspicious; but, like many things depicted on the big screen, this is far from reality. Actually, pawnshops, pawnshops and pawnshops are highly regulated.
At the federal level, pawnshops and operations are subject to 15 laws and regulations that help protect consumers and ensure fair business practices, among other things. Pawnshops are also subject to certain state and local laws governing details such as interest rates, loan terms, and record keeping. Finally, pawnshops are licensed by state and local governments, which evaluate and enforce the relevant laws.
Who should consider a loan at a pawnshop?
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- People with bad or no credit (although there are other, better options)
- People who urgently need cash (again, there are other ways)
- People who only need a small amount of money
- People who don’t worry about losing collateral forever
For the vast majority of people who take out a loan from a pawnshop, everything goes according to plan. According to the NPA, The average pawnshop loan repayment rate in the US is 85%.
Of course, this means that the remaining 15% make by default and lose their collateral, so you should only consider a pawnshop loan if you’re not too worried about saying goodbye to the item for good.
That being said, pawnshop loans can be an option for people with poor or limited financial history because, unlike other traditional lenders, pawnshops don’t need to check your credit or income in order to lend you money. In fact, most pawnshops just need a valid government-issued ID. As a result, if you fail to repay the loan or choose not to, your credit score will remain intact.
Read more: How Credit Works: Understanding the Credit Reporting System
If you decide to take your property to a local pawnshop, it’s always a good idea to first make sure it’s an NPA member store.
Who should not consider a loan at a pawnshop?
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- Almost everything, unless you can get a loan in another way.
Whether you pay off your loan or not, the costs associated with pawnshop loans are their biggest disadvantage.
Interest rates on loans in pawnshops usually range from 20% to 25% per month.; personal loanson the other hand, can offer the same rates annually, which makes pawnshops a particularly expensive means of obtaining quick cash. For example, $100 in debt for 30 days might cost $25. This is quite a high fee, but some pawnshops charge extra for storage and the like, which can drive up the price even more.
However, as mentioned earlier, states determine the interest rates that pawnshops can charge, so fees vary across the country.. In Nevada, for example, pawnshops can charge no more than 13% per annum per monthand in Ohio, interest rates are half as much, just 6% per month.
Another issue to consider is that many people try to use pawnshop loans for more than just a short-term solution. Many borrowers become repeat customers, but we only have a limited number of properties available for sale.
If you suspect that you will need to constantly borrow money, you should consider long-term alternatives such as a line of credit. This way you don’t risk losing your belongings and you can also improve your credit history for future transactions.
Read more: The best personal lines of credit
Alternatives to a pawnshop loan
Pawnshop loans aren’t always bad, but for most people, they really should be a last resort.
Luckily, there are plenty of other ways to make extra money without risking losing family heirlooms and valuables. Take a look at the list below of four popular alternatives to pawnshop loans.
1. Alternative Payday Loans (PAL)
Like loans in a pawnshop Alternative payday loans (PAL) are short-term and small..
You can usually find PALs ranging from $200 to $1,000 for one to six months, and interest rates are capped at 28%. Or if you need a little more money and a little more time, PAL II (second type of alternative payday loan, introduced National Credit Union Authority in 2019) are available for up to $2,000 for one year.
PAL I and PAL II are only available to federal credit union members (or those who have been a member for at least a month).
Read more: Top Credit Unions
2. Personal loans
Personal loans are a bit harder to get, but long-term savings make the extra work worth it.
With personal loans, you can get a lot more cash and have more time to pay it off. Plus, you won’t need to post a deposit to receive the money. However, traditional lenders will review your credit history to determine if you qualify.
Read more: Best personal loans for bad credit
While it is certainly possible to find a more attractive personal loan interest rate, the rates vary considerably.
A good option is to start your search on a site like Monevo. Monevo Shops over 30 lenders for you, all in one place, in seconds. This will not affect your credit score and you can secure rates between 1.99% – 35.99% per annum.
fiona is another popular aggregator. Like Monevo, fiona collects information from leading lenders so you can view quotes in one convenient place. Offers are also personalized based on your unique needs and financial history, so you can compare offers with confidence and choose the one that best suits your goals. To see your own rate specifically for your region, you can also check the table below:
There is also a growing number of lenders who do not require a credit check. Instead, they look at things like rent, cash flow, and employment history to assess your credit risk.
These alternative data lenders are specifically designed for people with bad credit history or no credit history at all and can be a good alternative to pawnshop loans.
Read more: Best loans without credit checks that use alternative credit data
3. Peer-to-peer loans
Peer-to-peer (P2P) lending is when a borrower receives a loan directly from individual investors rather than from an institution such as a bank or credit union.
These loans are generally not as stringent as banks or credit unions, making it easy to get decent credit even if you have a bad credit history.
They also tend to be much faster and the entire process can be done entirely online.
Read more: Best Peer Lending Sites for Borrowers and Investors
4. Credit cards
Pawnshop loans tend to be small dollar amounts and offer short repayment periods, but a credit card can do the same job of giving you the option to get a loan as well.
While credit cards still charge high interest, if you can pay off the balance before the due date, you may not pay that interest at all.
If you are not sure that you will be able to pay the required amount by the end of the month, then a credit card with 0% interest may be a good option. With these cards, you will not be charged any interest on any purchases or any balance for a set period of time (usually 12 to 21 months from the time the account was first opened).
Read more: Best credit cards 0% per annum
Or you can use a cash back credit card so you can make some money off of what you need the loan amount for (however you need to be sure you can pay off the balance quickly – otherwise you could easily end up pay much more interest than you earned back).
Read more: The best cashback credit cards
Summary
Loans at pawnshops can be an attractive solution for people with bad credit who need nothing more than a small amount of short-term loans; however, for most people, the benefits of bypassing credit requirements and getting cash fast are negligible compared to interest rates alone.
In many states, the interest rate is as high as 25%, not to mention additional storage costs and the like. Of course, on top of these high fees, borrowers risk losing valuable possessions, from antique family heirlooms to expensive electronics.
Before walking down the street to your local pawnshop, consider alternatives such as personal loans or credit cards.