Meet the Predators: Pawn Shops and Pawn Shop Loans


Why are Pawn Shops Predatory?

Pawn shops are a common sight on the streets of cities and towns across the U.S. And they are a great place to go thrifting for used items. But how do pawn shops actually work? Well, even though you might not think of them as a lender, that’s exactly what they are! Pawn shops issue small-dollar cash loans using people’s personal valuable items as collateral. That’s why they have so much great stuff for sale—it used to belong to people who probably didn’t want to part with it!

How do Pawn Shops work?

In order to get a loan from a pawn shop, you’re going to need an item of value—something like a musical instrument, a laptop computer, or a piece of jewelry. People bring the item into the pawn shop so that the pawnbroker can appraise its value. The broker will then issue the borrower a loan based on that value. They will also hold onto the item until the loan is repaid. If the borrower cannot repay the loan, the broker will put the item up for sale in their shop.

Pawn shop loans may seem convenient at first. A customer can walk in the door and walk out again with a pocket full of cash. Pawn shop loans also don’t require any kind of credit check. Anybody can get one so long as they own—and are willing to risk losing—an item of value. However, the principals for these loans are small, usually no more than a few hundred dollars at best. And then there’s the matter of their interest rates…

The rates that a pawn shop can charge on their loans are going to vary depending on state and local regulations.

Just like payday and title loans, pawn shop loans are typically short-term arrangements. That means that you’ll likely be paying by the month. And while the rates being charged might seem reasonable, they can add up fast.

Some pawn shop lenders charge a flat monthly fee. In Alabama, for instance, they can charge $25 for every month that the loan is outstanding. In other states, pawn shops can charge a monthly interest rate in addition to fees. For a $100 loan, that would be an APR of 300 percent! Pawn shops in Missouri can’t charge more than 2% in interest per month, but there are no regulations governing how much they can charge in fees.6 Many pawn shops charge storage fees.

Pawn shop interest rates can reach 240% or higher.7

If the borrower doesn’t pay the loan back, the pawn shop can simply sell the item to recoup their losses. The security that collateral offers lenders is why those loans so often come with lower rates. With a pawn shop loan, however, that security simply turns into extra profits for the lender.

While pawn shop loans are probably the least dangerous of the three, they are still rarely worth the risk.

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