Are pawnbroker loans worthwhile? | Smart Change: Personal Finance


When you need cash quickly and do not have the necessary balance to receive a good private loan, you may think about alternative credit products. These are things like payday loans, auto title loans, and pawnbroker loans.

Neither of these products are particularly good, and it is best to use them as a last resort. However, if you had to decide which one to choose, pawnbroker loans are the least damaging financially as they cannot harm your creditworthiness. However, they are not resilient and have their limits.

What is a pawn shop loan?

A pawn shop loan is one type of secured loanwhich means it is backed by collateral. In this case it is the deposit – the item that you bring with you and leave to the pawnbroker. If you repay the loan on time, you will get your deposit back. But if you don’t, the pawnbroker is allowed to keep the pawn and put it up for sale in their shop as payment for the loan.

As long as you have something of value, there are no other pawnbroker loans Qualification requirements. That is their strength; Unlike other loans that rely on checking your income and creditworthiness, you could go to a pawnshop with no income and no credit and still get a loan.

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In fact, pawnbroker loans are one of the oldest forms of credit for this very reason. After all, our ancestors didn’t have FICO scores or pay slips to prove their creditworthiness to lenders, so they used a collateral-based system like this one.

How do pawnbroker loans work?

First, find an item of value and take it to the pawn shop. Remember that it has to be something with a high resale value and that it can easily be sold to the general public. Your book collection may have cost you a lot, but it is unlikely that the pawnbroker will get much for it, for example. Popular pawns include jewelry, power tools, firearms, musical instruments, and electronics.

The pawnbroker will ask questions about your pawn to assess its value and make sure you actually own it (thieves often use pawn shops to turn stolen items into cash). Then they will ask if you want to sell or mortgage it.

When you mortgage it, they offer you a loan based on its value. You can usually expect a loan of 25 to 60% of the resale value (Important: The resale value is usually much lower than what you paid for the item when new!). In addition, pawn loans have a financing fee instead of an annual percentage rate of charge (APR), and they can be very expensive. The regulations vary widely from state to state, but when you do the math, you can pay the equivalent of 13% to 1,300% APR. In comparison, the average personal loan calculates an interest rate of around 9.65% APR.

For example, let’s say your farmer has a resale value of $ 1,000. The pawnbroker offers you a loan of 25% of its resale value ($ 250) with a financing fee of 25%. Not only do you owe $ 250 in principal, but you also owe $ 62.50 in financing fees. This means that you owe a total of $ 312.50 on a $ 250 loan.

All in all, if you take your loan you will get the money instantly and the pawnbroker will give you a pawn ticket, a receipt for what you have pawned. Make sure you don’t lose it as you will need it later to reclaim your item.

The pawnbroker will tell you when to return to repay the loan and reclaim your item, usually within 30 or 60 days. If you don’t return by that date, the pawnbroker will simply keep your item and put it up for sale in the store. There is no penalty for failing to pay by the due date as your collateral will then be used to repay the loan for you.

When are pawnbroker loans a smart move?

When you need money it’s almost always better apply for a loan through more traditional sources. This will save you money, build up credit and have access to a larger amount of money when you need it. But there are some cases where a pawn shop loan can really help you, such as when:

  • You need cash right now. Some personal lenders offer this Financing on the same day. However, if you need money almost immediately, you can go to a pawn shop and get cash in minutes.
  • All you need is a small amount of cash. Pawn shops usually only accept small items and only offer loans at a fraction of their value. So you can get a few hundred dollars at most.
  • You have something of value that you can possibly lose. If you are unable to pay off the loan by the due date, you could lose your property for good. Some people lose important family heirlooms.

Advantages and disadvantages of pawnbroking loans

If you are considering this Type of personal loan, use the list below to guide you. Are the positive aspects working for your situation? Are you able to deal with the drawbacks of pawnbroking loans? If so, you can take out a mortgage loan.

Benefits of pawnbroking loans

  • Fast financing: With the money you can leave the pawn shop in a few minutes.
  • Does not affect your balance: You do not need good credit (or actually a loan) to get a loan. And if you don’t pay, it won’t affect your creditworthiness either.
  • No hassle from creditors if you don’t pay: You will not be referred to collection agencies or hunted by creditors if you fail to pay the loan. In this case, the pawnbroker simply takes ownership of your pawn and sells it to get the money back.

Disadvantages of pawnbroking loans

  • Potentially expensive: Given the funding fee that comes with pawn loans, they can be dramatically more expensive than a traditional personal loan. Take this into account when deciding whether this is the right financing option for you.
  • Loans are very small: The average pawn loan is $ 150 and lasts 30 days, so the National Association of Pawnbrokers. To find out how much you can get for your loan, calculate the resale value of your item, then multiply it by 0.25 and 0.60 – this is the range you can expect.
  • You can lose your pawn: If you lose your pawn ticket, you cannot get your deposit back. If you don’t pay off the loan by the due date, you could lose your pledge as well. For example, many lose their grandmother’s wedding ring.
  • Doesn’t build credit: Since mortgage loans do not report to the Schufa, they do not help you either Build up credit. Without credit, you will have a harder time renting or buying a home, qualifying for better loans and credit cards, or in some cases even getting a job.

Alternatives to pawn shop loans

If you are in need and cannot apply for a more traditional loan, pawnbroker loans are not your only option. You can consider:

  • Request for an extension. It can be painful to ask, but when you have bills due, companies are often willing to work with you if you get caught in a temporary financial hook.
  • Seek help from a charity. 211.org is a great resource for finding local charities that can offer temporary help, especially to disadvantaged people. The money is meant for you; Make sure you take advantage of it when it is there.
  • Sell ​​something. Pawn shops aren’t the only place you can sell things. You can often get much better prices through Craigslist, Facebook Marketplace, OfferUp, or other marketplaces if you can wait a few days to find a buyer.
  • Registration for a part-time job. Many Outside employment You can sign up and start making money right away, e.g. B. at Uber (and Uber Eats), Rover, TaskRabbit, Transcription and Mystery Shopping.
  • Find an Alternative Payday Loan (PAL). Some credit unions offer this Small loans to their members. These loans help build credit and don’t have outrageous fees and hence they can be a great option.
  • Save an emergency fund. This won’t help you if you need help today, but now is a good time to think about one Emergency fund when you have the means This way, the next time you land in a rough area, you’ll have a pillow to catch you.

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