5 Reasons to Avoid Pawn Shop Loans


Pawn shop loans might seem like a good option for fast cash when you need it, but they could end up costing much more than anticipated.

If you’re looking to buy a diamond necklace at a reasonable price, heading to a pawn shop isn’t a bad plan. But selling to a pawn shop is a whole other story.

In addition to selling a vast selection of engagement rings, discarded musical instruments, mismatched tools, and old tech items, pawn shops offer cash loans in exchange for your belongings. 

Here’s how pawn shop loans work: You bring in an item as collateral, and the pawnbroker will determine the value of the item, give you a loan based on its cost, and then hang on to your collateral until you’ve paid off the loan. In a nutshell, it is one way to get a personal loan without a credit check

The Appeal of Pawning

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 is it worth your trouble?

Pawn shop loans can be safer than other kinds of storefront loans, like payday loans or auto title loans. If you can’t pay back the loan, all you may lose is the item you left with the pawnbroker. 

Unlike with a payday loan, there’s no unending cycle of debt and 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 trades in their laptop, for example, you may not be able to work if you’re unable to pay back your loan. Give up something of sentimental value like a family heirloom, and you could be kicking yourself for defaulting on that loan for the rest of your life.

While a pawn shop loan might seem like a good idea in theory, in practice it can be 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 reasons you may want to keep your belongings out of a pawnbroker’s hands.

1. Pawn shops loan amounts

During the 2019 U.S. government shutdown, The New York Times reported on a pawn shop in Alexandria, Virginia that was only able to give a family dealing with the repercussions of the furlough $75 in exchange for their 60-inch, high-definition, flat screen television. They were hoping to get at least $200 for the trade.    

Pawnbrokers typically give out small loan amounts even if the item you are pawning is worth more. If that necklace from your grandmother is worth $800, you probably aren’t going to 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; according to the National Pawnbrokers Association,  the average pawnshop loan is $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 of balsa wood and spray paint, your device probably cost quite a bit more than $100. 

2. The cost to benefit ratio 

If you want to get your item 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 can charge varies from state to state, but it can be pretty high. 

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 purchased. Think about that iPad again for a moment. You paid $700 to buy it. Then you pawned it for $100, and ended up paying $115 back to the pawnbroker before you could reclaim it. Now you’ve paid more than the original price for that iPad. 

You may even have the opportunity to extend or renew your pawn loan, but remember: The more you pawn something, the more you end up paying for it in the long run.

3. You could lose your belongings

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, conversations with debt collectors – and in some extreme cases – having your wages garnished to pay off the debt. When you take out a pawnshop loan, all you may stand to lose is the item you pawned.

While the National Pawnbrokers Association estimates that nearly 80% of all pawn loans are eventually paid back, there are places in the country where the pickup rate for pawned items is far lower. That means many people who give up their belongings for quick cash are not able to get them back. Ask yourself: Is it worth risking sentimental family heirlooms for a small cash loan?

4. Some pawnbrokers operate illegally

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

In fact, in January 2017, the U.S. Consumer Financial Protection Bureau accused three pawn shops in Virginia’s Fredericksburg area of operating outside the law. An article from Fredricksburg.com said the companies in question “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 

When you find yourself in a tight personal finance spot, it might seem like you have an obligation to take out a costly pawn shop loan if your options are limited. But you deserve better than a pawn shop loan, and chances are, you don’t have to settle.

Even people with bad or no credit may be able to qualify for safe, responsible online personal installment loans, which are a more strategic alternative to other types of loans. Personal installment loans may be a better alternative for a number of reasons:

  • First, they can help improve your credit, as on-time payments are typically 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 any contract how much you have to pay every month and how long it will take to pay off the loan.

Don’t risk losing your precious property. Educate yourself before you jump into a pawn shop loan, and make a choice that will benefit both your family and your bank account.

This blog post was updated April 26, 2018, and again December 14, 2019.

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