5 Reasons to Avoid Pawn Shop Loans

Pawn shop loans might seem like an easy way to get fast cash, but they could end up costing more than you bargained for.

Updated: April 26, 2018

If you’re looking to buy a diamond necklace at a reasonable price, heading to a pawn shop isn’t a bad plan. But in addition to selling a vast selection of engagement rings, discarded musical instruments, mismatched tools and old tech items, pawn shops also offer cash loans in exchange for your belongings. Here’s how pawn shop loans work: you bring in something of value as collateral, and the pawnbroker will evaluate the item, give you a loan based on its cost, and hang on to your collateral until you’ve paid off the loan.

Pawn shop loans are definitely safer than other kinds of storefront loans, like payday loans or auto title loans. If you can’t pay back the loan, all you lose is the item you left with the pawnbroker. Unlike with a payday loan, there’s no unending cycle of debt, no ding in your credit score. But depending on what you put up for collateral, that could be a big loss for you. If you’re a freelancer who puts up their laptop, for example, you could be out of a job if you’re unable to pay back your loan. Give up something of sentimental value, and you could be kicking yourself for defaulting that loan for the rest of your life.

While a pawn shop loan might seem like a good idea in theory, in practice, it’s an expensive and risky proposition. If you’re considering taking out a pawn shop loan, do yourself a favor and read up on the risks first. Here are five good reasons to keep your stuff out of a pawnbroker’s hands.

1. Pawn shops offer VERY low loan amounts.

We’ve all been here once or twice: you need money NOW, but payday is still weeks away. Your credit isn’t great, which means you don’t qualify for any of those cash back credit cards, and your bills were due yesterday. It might seem like a good time to take that pearl necklace you inherited from your grandmother to the pawn shop and get a loan, but it’s likely not worth your trouble.

Why? Well, pawnbrokers typically give out very small loan amounts. Even if that necklace is worth $800, that doesn’t mean you’re gonna be able to secure an $800 pawnshop loan! In fact, most pawnbrokers will offer you a loan amount that’s just a fraction of your item’s value, and the average pawnshop loan is for just $150.

Imagine this: you put down your brand new iPad as collateral for a $100 loan, but you just can’t pay it back on time. How much did that iPad cost you in the first place? Unless it was made out balsa wood and spray paint, your device probably cost quite a bit more than $100. But sorry! You just sold that $700 piece of technology for $100!

2. You’ll end up paying a lot to get back items you already own. 

If you want to get your stuff back, you’ll have to pay back the loan – plus interest – before your loan term is up. The amount of interest and fees a pawnbroker is allowed to charge you varies from state to state, but it can be pretty high. While many states cap APR at 36 percent, which works out to about 3 percent per month, some pawn shops use loopholes in their state laws to charge additional fees on top of the interest. The longer your loan term, the more money you’re going to be paying your pawn broker to get back an item that you’ve already bought and paid for. The more often you pawn off a certain item, the more money you’re paying into owning it.

Think about that iPad again for a moment. You paid $700 to buy it. Then you pawned it for $100, and ended up paying around $115 total before you could get it back. Now you’ve paid $815 for that iPad. Use it again, and you’ve paid $930. The more you pawn something, the more you end up paying for it in the long run.

3. You could lose your things. 

As previously stated, pawn shop loans are definitely less risky than payday, title or cash advance loans. Default on one of those puppies, and you could be looking at years of bad credit, being stalked by the debt collector – and in some extreme cases – having your wages garnished to pay off the debt. When you take out a pawnshop loan, all you really stand to lose is the item you pawned.

While the National Pawnbrokers Association estimates that nearly 80 percent of all pawn loans are eventually paid back, there are places in the country where the pickup rate for pawned items is as low as 50 percent. That means that only half of the people who give up their belongings for quick cash are able to get them back. Ask yourself, is it worth risking that sentimental family heirloom for a small cash loan?

4. Some pawnbrokers are operating illegally.

Most states have cracked down on pawn shop loan regulation, but that doesn’t mean that all pawnbrokers are following those laws. In recent years, there have been many reports of pawn shops charging more than the APR rates, having people sign illegal contracts and deceiving customers about the actual price of their loans.

In fact, in January 2017, the CFPB accused three pawn shops in Fredricksburg, Virginia of operating outside the law. According to an article from Fredricksburg.com, “Spotsylvania Gold & Pawn, Fredericksburg Gold & Pawn and B&B Pawnbrokers understated the annual interest rates on their loan contracts by as much as half, according to three separate lawsuits filed in the U.S. District Court for the Eastern District of Virginia.”

A lawsuit was then filed against the pawn shops by Virginia Attorney General Mark Herring, and two out of three settled in March 2017, agreeing to pay more than $62,000 in refunds to more than 1,000 former customers.

5. There are better alternatives out there. 

When you find yourself in a tight financial spot, it might seem like you have an obligation to take out a costly payday or pawn shop loan, because your options are limited. But the fact of the matter is that you deserve better than a pawn shop loan, and chances are, you don’t have to settle.

Even people with bad or no credit can qualify for safe, responsible online personal installment loans, which are an infinitely better and more strategic alternative to pawn shop, payday, and car title loans. Personal installment loans are good for a number of reasons. First, they can help improve your credit, as on-time payments are reported to the credit bureaus. Unlike with payday, title or pawn shop loans, installment loans typically have longer terms and set payment that you can actually afford. You’ll know before you sign anything exactly how much you have to pay every month, and how long it will take until your loan is paid off.

Don’t risk losing your precious property. Educate yourself before you jump into a pawn shop loan, and make a choice that your family and your finances will thank you for.

To learn more the dangers of predatory lending, check out these related posts and articles from OppLoans:

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