You might be thinking about getting a loan from a pawnshop if you need some quick cash to pay for an emergency or unforeseen bill. But are they coherent? The immediate response is: most likely only the last resort. Loans from pawn shops may be costly. You could be required to pay back up to $175 if you borrowed $100 for 90 days.
Alternatives such as personal loans, credit cards, and others are often far more affordable methods of borrowing money (see our monthly payments calculator below to consider a personal loan). While certain loan kinds (like payday loans) have even higher interest rates, pawnshop loans are still among your worst options.
How a Pawnshop Loan Works
Loans from pawn shops are short-term, secured loans. When you take out a loan from a pawnshop, you bring items like jewelry or musical instruments to use as collateral until the loan is repaid. No minimum income or credit score is required to be eligible. Instead, knowing that they will sell the item if you default on your loan, the pawnbroker authorizes your loan based on the value of your collateral. The fundamentals of pawnshop loans are as follows:
They are often for little sums: The National Pawnbrokers Association estimates that the typical pawnshop loan in the United States is $150.
There is no requirement for credit: Pawnshop loans are not subject to credit checks, and defaulting on a loan has no impact on your history.
The costs of borrowing money are high: When you borrow money from pawnshops, the charges can range greatly and include interest as well as processing or storage fees in some situations. In general, this kind of borrowing is pricey. In many places, the fees are seen as a part of the overall cost of borrowing and are frequently charged monthly, up to the legal maximums imposed by the state.
The loan repayment terms are brief (and optional): You typically have 30 to 90 days to pay back a pawn loan, but unlike many other loans, doing so isn’t required.
Should You Borrow From a Pawnshop?
Pawnshop loans give you access to fast money, but they come with a cost. Even though states regulate pawn businesses, some have very high fee caps.
For example, Georgia limits the total interest and costs to 25% of the principal per month for the initial 90 days and 12.5% per month following that. Texas permits pawnshops to charge up to 20% per month, depending on the loan amount, while Florida’s combined ceiling is 25% per month regardless of the length of the loan. There are better states. In New Mexico, fees cannot be more than 10% for the first 30 days and 4% for the following periods.
Remember that these are monthly fees, thus the annual percentage rate (APR) for them can be 240%-300% or more, compared with 20% for a credit card, for instance. Looked at it another way, if you borrow $100 for three months, the financing could cost you $75 through a pawnshop and $5 with a credit card.
You could, however, do worse. While the terms of payday and auto title loans are typically quite brief—as little as two weeks—the corresponding APRs can be absurd. An effective APR for a payday loan, which is taken out against your upcoming salary, may be close to 400%. The effective APR on auto title loans might be as least 300%. Additionally, if you don’t make payments, the lender may repossess your car.
Alternative Sources To Consider
Consider your options before taking out a loan from a pawnshop.
Payday Alternative Loans (PALs): If you are a credit union member, you might have access to PALs, which offer $200 to $1,000 in short-term funding. Government restrictions include a $20 limitation on application fees and a 28% APR ceiling.
Personal loans: You can borrow money without putting up any security with a personal loan. Lenders often look at your credit history, and you must demonstrate that you have enough money. Although some are significantly higher than that, APRs might be in the single digits. For instance, U.S. Bank charges $48–$60 for a $400 loan over three months, which results in an effective APR of more than 70%.
Credit cards: If you have credit card accounts, you can rapidly borrow money by using your card to make a purchase or by requesting a cash advance. An average credit card has an APR of just over 20%. Be warned that fees and interest for cash advances normally range from 3% to 5% of the transaction amount.
Negotiate payments: If your bills are piling up, consider altering or adding a payment plan.
- Student loans might be eligible for income-driven repayment, forbearance, or deferment.
- Some healthcare providers let you pay for services with interest-free payment plans.
- Utility companies might develop programs to lessen the financial burden.
Payroll advance: Inquire with your employer about having a portion of your upcoming paycheck advanced if you just require a small sum. Instead of paying interest and fees, you can simply borrow from yourself. Keep in mind that you’ll receive less on your subsequent paycheck, so this isn’t a long-term solution.
Government and nonprofit assistance: Look for government and nonprofit aid programs that provide necessities like food and lodging. For a summary of benefit programs, consult this interagency website or contact your neighborhood’s nonprofit organizations or social services department.
Sell items: To minimize financing fees, sell items rather than take them to a pawnshop if you’re willing to part with them permanently.
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