What Is a Pawnshop Loan? And How Do They Work?

Written by Bradon MatthewsReviewed by Nathan Brown, CFP®Updated: 11th Apr 2022
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When you think of a loan, chances are you know a little bit about mortgages,personal loans, auto loans, and student loans.

You certainly know loans come with a lengthy application process, fees, and lots of bureaucracy.

Between online loans, bank loans, and credit union loans, the opportunities to receive funding are nearly endless.

However, today we’re going to look at one alternative to traditional loans: pawnshop loans. What is a pawn shop loan? How do pawnshop loans work? What do you need to consider before accepting a pawnshop loan?

This article will delve into all these questions to better understand pawnshop loans and whether they can help you or not. Let’s start by explaining what a pawnshop loan is.

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What Is a Pawnshop Loan?

Put simply, a pawnshop loan is a loan that you take out from a pawnshop. The exact terms and conditions can vary significantly from one Pawnshop to another. However, they all have one thing in common: they are aggressively expensive, and the terms are borderline outrageous.

The amount you get and the terms of repayment will depend on your unique financial circumstances.

While it’s simple to get a pawnshop loan, there is a reason you don’t hear about them very frequently. They tend to be the last resort for people who can’t get loans from a more traditional lender.

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How Do Pawnshop Loans Work?

Pawnshop loans are secured loans. Where a typical bank loan just grants you the money when you take out a loan, a pawnshop loan requires some form of collateral. Whether it’s your golf clubs or television, you need to offer some good up to the Pawnshop.

While you can get a secured loan from a bank or credit union, the requirements are stricter. On the other hand, pawnshops use household items to secure your loan.

To get a pawnshop loan, a potential borrower brings in something of value to the shop. The shopkeeper will then run an appraisal on the item to value it.

The value correlates to the loan amount the Pawnshop will offer the potential borrower. They won’t just offer the exact value, though. The amount they offer will vary, but it will typically be somewhere around 25% to 60% of the item’s value.

There will typically also be something of a check to ensure you own the item in question. Pawnshops see a lot of stolen goods, and as such, they like to ensure that you have a legitimate claim to the item before offering you a loan.

If the borrower agrees, the Pawnshop will give them the money on the spot and proceed to hold the item until the loan is repaid.

The repayment periods are negotiable but tend to be quite short, usually a month or two. The interest rates and fees will also vary but are known to be extraordinarily high. In some cases, they rival payday loans.

There are a few benefits to this arrangement. For one, the shops rarely require a credit check, meaning you won’t hurt your credit by taking out a loan from them. They are also easier to get for those with bad credit histories.

Additionally, pawnshop loans deliver your money immediately, meaning they can be great for emergency situations.

That said, there are downsides are hefty fees and high-interest rates. This means you often wind up paying a lot more for your loan than you would elsewhere.

On top of that, the Pawnshop will take your item if you cannot repay the loan. And remember, you didn’t even get the full appraisal value. The Pawnshop most likely gave you 25% to 50% of the total value of the item you originally brought in.

These are just a few reasons why you should avoid pawnshop loans at all costs.

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When Are Pawnshop Loans a Smart Money Move?

Pawnshop loans should be used only when they are situationally appropriate. Let’s take a look at the few scenarios where a pawnshop loan might make sense.

#1. You Need Quick Cash to Cover an Emergency

Life is full of unexpected plot twists. Sometimes these are great, like when you find a $20 bill on the sidewalk.

Other times they’re not.

When life suddenly presents you with a financial emergency, you may need to fork over a significant amount to deal with it. When you don’t have the funds available to cover the expenses, a pawnshop loan can help you get through this difficult time.

Pawnshop loans can be a smart money move when not paying the unexpected expense is not an option or will make the cost greater down the road.

Pawnshop loans get you your cash immediately, allowing you to deal with these troubling situations quickly and prevent long-term damage.

#2. You Don’t Need that Much Capital

Pawnshop loans are generally not very big. This is one of the things that makes them a good choice in some financial situations.

Imagine you need a loan of $100 for some minor repair. If you go to a bank, they may not even offer a loan that small.

Now you could just take out a larger loan, use the $100 for the repairs you need, then pay the rest back on the repayment plan, but that means that you’ll wind up paying interest on more than you needed.

This is why pawnshops can sometimes offer loans that are a better choice than traditional loans. The ability to pull out just what you need means you won’t wind up paying fees just because you must take out some minimum amount.

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#3. The Item You Put Up as Collateral Isn’t that Valuable

Pawnshop loans are good if you have an item that you can put up as collateral. We recommend putting up an item that you have no emotional connection to.

Where a traditional loan locks you in for an exact monetary amount, pawnshops will usually just take the item you put up as collateral if you cannot repay the loan.

Pawnshop Loans Pros and Cons

As stated earlier, pawnshop loans carry their own unique benefits and drawbacks. It’s important to know what these are to accurately assess the situation and make a positive financial decision.

Pros:

  • Pawnshop loans are very easy to get. If you have an item of reasonable worth, you can take out a pawnshop loan. This means those with bad credit can still access the money they need.
  • Pawnshop loans are funded the day you put up collateral.
  • They do not involve a credit check. This means that your loan won’t affect your credit score.

Cons:

  • Pawnshop loans will vary in terms (fees & interest rates). You really don’t know how much you’ll be offered or what the conditions will be until you check with your local shop. This makes it hard to plan.
  • Just to reiterate, pawnshop loans are expensive. The APRs are almost always high, and there are often a host of fees involved.
  • Pawnshop loans depend entirely upon you having a valuable item. If you need more than your item is worth, you’ll have to look elsewhere.

Why Are Pawnshop Loans Risky?

All loans come with a significant amount of risk. How do pawnshop loans stack up to the competition?

With most loans, if you simply stop repaying, it’s going to get ugly. Your credit will be impacted, you’ll likely face late fees, and debt collectors will harass you endlessly.

Pawnshop loans aren’t like that. If you are unable to pay your debt, the shop simply takes your item. This means the risk is entirely up to you, as you control what item you give as collateral.

Additionally, the credit bureaus won’t be notified if you don’t pay back your loan. However, the fees are high, and the interest rate will add to the overall cost of the pawnshop loan.

Alternatives to Pawnshop Loans

  • Online Personal Loans: A suite of online lenders can provide online personal loans to people of all financial backgrounds.
  • Borrowing from a Friend: Friends will often loan money at little to no cost, making them a very safe option when you need a bit of cash.
  • Borrowing from a Relative: The same goes for relatives.
  • Start a Side Hustle: If it isn’t pressing, it might be worth it for you to get your money via a side hustle. The internet has made it easier than ever to make money using your skills.
  • Payday Loans: Payday loans are short-term loans that function like an advance on your paycheck. They tend to be very predatory, though, so we advise against them.
  • Use Your Emergency Fund Instead: The best option is to have an emergency fund. If you can, it’s always wise to set some money aside, so you don’t have to turn to loans during a crisis.
  • Sell Used/Old Items You Don’t Need: If you have valuable items you don’t need, you can simply sell the items rather than use them as collateral.
  • Short-Term Loans: There are plenty of places to take out short-term loans, both online and in-person.
  • Direct-Deposit Loans: Direct deposit loans are another kind of short-term loan that can provide money rapidly.

Bottom Line: What Is a Pawnshop Loan?

Pawnshop loans are loans taken from a pawnshop using your personal items as collateral.

While pawnshop loans are quick and easy to qualify for, they are typically expensive. They can be useful in certain situations, but you need to evaluate your own circumstances to know if they are a good idea.

Use the information in this article to guide you, and you won’t wind up paying more than you should or losing an important item due to a defaulted loan.

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Bradon Matthews
Bradon Matthews

Bradon Mathews is a personal finance writer & product analyst with a breadth of experience. He enjoys analyzing market information and trends to help you make sense of the complex and ever-changing world of finance. His passion is providing practical advice so you can feel more confident managing your money. Bradon attended Colorado State University where he studied Philosophy.