Payday Loans vs Pawnshop Loans

Inside Subprime: Dec 10, 2018

By Jessica Easto

We recently looked at the similarities and differences between payday loans and title loans. Now let’s look at pawnshop loans, another option that is frequently marketed to people who need cash quick and can’t go through traditional lending channels.

Remember, payday loans and title loans are forms of predatory lending—the kind that uses questionable tactics and unfair terms to bleed vulnerable populations of billions of dollars each year. Although most states have laws that regular pawnshop loans, not all pawnshop brokers follow them, and this type of lending frequently falls into the predatory camp as well.

The good news—if you can call it that—is that pawnshop loans are less toxic than payday loans and title loans. The bad news is they are still risky, costly, and are unlikely to solve your financial problems.

Pawnshop loans require you to put up something you own as collateral. The amount you receive depends on the value of your possessions. However, the pawnshop broker is not going to offer a loan equal to the full value of your property—he’s only going to offer a fraction of it. According to NOLO, the average amount of a pawnshop loan is $75 to $100. Payday loans tend to offer a bit more, with many states capping payday loan principals at $500, and you don’t need to put anything up for collateral.

From there, the pawnshop owner will tell you what your fees are (they frequently don’t talk in terms of annual percentage rates [APR]) and other terms, such as your repayment schedule. Compared to payday loans—which commonly have APRs of 300 to 400 percent or more—pawnshop loans have relatively low APRs. An average monthly interest rate is 10 percent, which works out to an APR of 120 percent (although they can be much higher, depending on your states regulations.) Usually, pawnshop loans have repayment terms that range from one to a few months.

Imagine you are putting up your $700 computer as collateral, and after it was valued and assessed by the pawnbroker, you walked out of the shop with a $100 loan. Even if you pay it back only one month later, your total charge would be $110, which means you technically now paid $810 for your computer.

But what if you can’t repay the loan? This is where pawnshop loans are a bit less risky than payday loans. If you can’t repay a pawnshop loan, the pawnshop keeps the property you left as collateral. That’s really the only thing you lose; there is no legal requirement to repay pawnshop loans, so your credit is not affected.

If you can’t repay a payday loan, however, it can hurt your credit, overdraw your bank account, incite calls from the debt collector, and even cause your wages to be garnished. Additionally, payday lenders frequently allow borrowers to rollover their debt. This gives you more time to pay back the loan, but it also adds interest and fees, which increases your debt. This can happen over and over again, snaring you in a debt trap that is difficult to get out of.

The takeaway? Pawnshop loans are less risky than payday loans, but they aren’t the best option. Learn more about avoiding cash advance scams and alternatives to costly storefront loans.

For more information on payday loans, scams, cash advances, and title loans, check out our state financial guides including, Illinois, Texas, Florida and more.