Pawnshop Loans of May 2023

What is a pawnshop loan?

A pawnshop loan is one of the most common types of secured loan. This loan requires collateral and the loan amount directly depends on the value of the pawn. If the borrower pays the loan in full, the pawnshop returns the pawn. If the borrower has problems with the payment of the loan, the pawn of the borrower becomes the property of the pawnshop.

The main feature of pawn shop loans is that the borrower only needs collateral to take such a loan. The borrower may have a low credit score and have no income, but take a pawn shop loan against the value of the collateral.

How pawnshop loans work

Before taking a pawn shop loan, a potential borrower needs to make sure that the pawn they will provide at the pawnshop has a high resale value. Since many borrowers don't repay pawn loans, their valuables are sold to other people so that the pawn shop doesn't lose money. That is why the collateral should be such that it can be easily sold to others. It can be jewelry, musical instruments, or electronics.

A pawnbroker will ask the borrower questions about the value they have brought. Questions are asked to determine how much a pawn can cost and whether it is stolen. Many thieves bring stolen items to the pawnshop for sale. The borrower can both sell the thing and pawn it.

Pawn shops are chasing profits, and therefore the borrower should not expect a loan amount of over 60% of the resale value of the collateral. Some pawn brokers also offer much smaller amounts near 25% of the resale value. This is even though the resale cost itself is lower than the market value. Pawnshops don't have APR or interest rates. They take a one-time finance fee instead of them. The indicators of the finance fee may vary depending on the state. If you present finance fees as APR, the figures can reach 1300% APR, which is very expensive compared to any other traditional loan.

After the borrower agrees to the terms of the pawn loan, they can get cash immediately, a pawn ticket with which the borrower can come and redeem the collateral left. It is crucial to save a pawn ticket to get the pawned item back. The average pawnshop loan has a payment period of 30 to 60 days. Some pawn shops offer a grace period of 30 days, increasing the loan term.

Pros and cons of pawnshop loans

Pros

• There is no legal requirement to repay pawn shop loans. Pawn shop loans work, so that pawn shop doesn't oblige the borrower to pay the loan. The borrower can get quick cash for some value and is not obliged to buy it back. No one will sue the borrower for non-payment of a pawn shop loan, and the borrower will not face debt collectors. A pawn shop will simply sell the collateral for more than the redemption price and get its profit. According to data from the National Pawnbrokers Association, 15% of borrowers don't repay pawnshop loans.
• Pawn shop loans can help pay off another personal loan. Sometimes, taking a pawn loan may be cheaper than paying a fine or late fee for a credit card or other personal loan. In such cases, it is better to borrow money at a pawnshop and get collateral back after the next payday than to pay a late payment penalty on another loan. The late fee for some loans can reach up to $40, and credit cards can accumulate a penalty APR that will greatly increase the amount of the borrower's debt.
• A pawn loan is suitable for borrowers who cannot be qualified for a conventional loan. Pawnshops have no requirements for credit scores and don't make a credit check. The borrower doesn't even need to prove the existence of income. For borrowing money in a pawnshop, it is enough for borrowers to have valuable collateral with them. For this reason, this loan is great for borrowers with a limited credit history or without it at all or the lack a permanent income. Not paying such a loan will not affect the borrower's credit score since they are not obliged to pay the loan.
• Instant receipt of funds. This type of loan allows the borrower to receive cash instantly. Payday loans give instant access to money, but they can be much more expensive than pawn loans. To receive a pawn loan, the borrower doesn't need to confirm the income, and they will not feel pressure regarding repayment.

Cons

• A pawn loan is more expensive than other personal loans. Getting a pawn shop loan is a simple but expensive process. This loan is one of the most expensive. For example, payday loans usually have an APR near 400% to 700%. Pawnshop loans, although they don't have APR and interest rates, have an expensive one-time commission for taking a loan. If we translate the indicator of such a commission into the APR indicator, it can reach up to 1300%, which is several times more than that of an expensive payday loan.
• The loan term is too short. The repayment period of such a loan is usually from 30 to 60 days. And even considering the grace period, this period is quite short. Not every borrower can pay the principal loan amount in full. Some borrowers want to get the collateral back but don't have time to collect the amount in such a short period.
• Pawnshops value collateral much lower than the real value. Pawnbroker, in pursuit of profit, will evaluate the value brought by the borrower several times cheaper than the market price. First, they will call the resale value lower than the usual price. Then they will give the borrower a loan in the amount of 25%-60% of the resale value. Thus, the borrower's collateral loses a lot in price in the pawnshop.
• The risk of losing collateral. The main drawback of any secured personal loan is the risk of losing collateral. The borrower should take out such a loan only in case of an emergency, since the risk of losing a valuable thing increases due to the short loan repayment period.

How to choose a pawnshop lender

When choosing a suitable pawn shop lender, the borrower needs to pay attention to several important aspects.

The most important factor when comparing lenders is the size of a one-time finance charge. Different pawnshops may require different fees. The borrower is recommended to look for a pawnshop that offers the most inexpensive services, since the loan itself is expensive, and it is profitable not to have a large overpayment.

It is also important for the borrower to determine whether the pawnshop offers loan extensions or renewals. Some pawnshops may extend the term loan at the request of the borrower. The borrower can pay interest and renew the loan by getting a loan for 30 to 60 days. At the same time, the deadline for payment of the principal amount is postponed to the end of the new loan term. If the borrower doesn't want to lose the thing left as collateral, they need to look for a pawnshop that will agree to extend the loan term or renew the loan.

Another important factor to consider is the loan-to-value (LTV) ratio. In pursuit of profit, pawnshops can offer borrowers a much smaller loan amount than the real value of the collateral. The borrower should skip pawnshops that offer 25% of the item's resale value, and it is best to look for a pawnshop that can offer up to a 60% loan-to-value (LTV) ratio. However, the borrower should remember that the loan-to-value (LTV) ratio is also affected by the condition and resale potential of the collateral.

Online lenders don't offer this type of loan. The borrower cannot quickly pre-qualify for many loan offers from different lenders and compare the terms. To compare loan offers, the borrower will have to come to pawnshops in person and find out the details of loan conditions.

Also, the borrower should familiarize themselves with state laws since pawnshops work differently in each state.

Applying for a pawnshop loan

A pawnshop loan has some requirements in common with other loans. The borrower must be 18 years old and be a permanent resident or a US citizen. To confirm the borrower's identity, the lender may ask them to provide a driver's license, passport, or state-issued ID.

Such a loan has no requirements regarding credit score and income level. To obtain this loan, the borrower needs to have valuable collateral and an identity document.

To obtain a pawnshop loan, the borrower needs to bring collateral with him to the pawnshop. The pawnshop employee will ask a few questions to find out if the thing brought has been stolen and how much it costs. After that, the borrower signs the loan agreement and immediately receives the money and the pawn ticket needed to pick up the collateral when the loan is paid.