Are pawn shop loans a good borrowing option?

Getting approved for a loan can take some time, which is why some people in need of quick cash look for same-day loans, including pawn shop loans. A pawn shop loan may be enticing for a person with poor credit that needs immediate access to cash. However, it is important to understand the risks and benefits of pawn shop loans. Many of them come with high fees and other financial risks, which may make them a poor choice.

Let’s take a look at how a pawn shop loan works and why you might want to consider an alternative lending option.

What is a pawn shop loan?

A pawn shop loan, or pawnbroker loan, is a type of short-term secured loan available at traditional or online pawn shops. Your collateral, or “pawn,” can be almost any item of value, including jewelry, an instrument, an antique, or any possession that holds value (and can be resold). After assessing the item’s value, condition and potential for resale, the pawnbroker may offer you a loan amount they deem appropriate.

Pawn shop loans do not require a hard pull on your credit. Instead, the item you give to the pawnbroker serves as your collateral in this secured loan. However, if you can’t repay the loan amount within the agreed time period, the pawn shop can keep your item and resell it in the store.

Along with causing you to risk losing a valuable item forever, pawn shop loans don’t come cheap. Additional fees and charges can add up and leave you in a worse financial situation than you started out in.

How do pawn shop loans work?

Pawn shop loans typically don’t require hard inquiries or other types of credit checks. These loans only require that you’re over the age of 18, can show proof of identity and can bring in an item to pawn off – preferably one the broker could resell for high value. Common pawns are jewelry, electronics, firearms and musical instruments.

The loan amount that a pawnbroker offers will be based on the item’s assessed resale value, often much lower than its original purchase price. If the item is approved, a lender will typically offer 25% – 60% of the resale value.

So if you bring in an item worth $2,000 in resale value and a pawnbroker offers you a loan worth 25% of that, your loan amount will be $500.

Here’s where the additional costs come in: The average annual percentage rate (APR), or “financing fee,” for a pawn shop loan is around 200%, according to Sofi. Rates and terms vary between pawn shops, but a monthly interest rate can be as high as 20% – 25%. It’s important to understand the financial impact of repaying the loan.

Let’s go back to our $500 loan example. If your lender charges you 25% interest, that’s an additional $125 you’ll owe on the loan, for a total of $625. Most pawn shop loan terms are 30 – 60 days, and if you can’t repay the loan (plus interest) by the agreed-upon date, the pawn shop may sell your collateral. Some pawnbrokers may allow you to rollover or extend your loan, but that could cost you another financing fee.

Pros and cons of pawn shop loans

It’s important to understand both the benefits and drawbacks of pawn shop loans before making your decision:

Pros

• Fast funding of the loan: Pawn shop loans are finalized the same day; this allows you to get the cash they need immediately.
• No hard pulls on credit: These loans rely on the value of collateral. Pawn shops do not run a credit check or look at your credit score for these loans.
• Defaulting on the loan might not impact credit: Most pawn shops do not report payments to the credit bureaus, so there is no adverse credit impact if you fail to repay the loan. Instead, the pawn shop simply keeps the item of value.

Cons

• Expensive interest rates and fees: Pawn shop loans typically charge around 200% APR, with 20% – 25% monthly interest rates and additional fees on top of that.
• Low loan amounts: Pawn loans are only a percentage of an item’s resale value, which is typically much lower than its original value. The average pawn loan is about $180, according to the National Pawnbrokers Association (NPA).
• Possibly losing your item for good: Failing to repay a pawn loan can result in the pawnbroker reselling your item in the store.
• No credit benefits: Pawn shop loans won’t hurt your credit, but they won’t help build credit either. Pawn shop lenders don’t report to any of the credit bureaus, so the lending agreement is solely between the borrower and the lender.

Are pawn shop loans safe?

The federal government regulates pawn shops, but some pawnbrokers may operate illegally and charge higher than a state’s allowed APR and commit other acts of predatory lending. The Consumer Financial Protection Bureau (CFPB) has filed numerous lawsuits against certain pawn shops for illegal practices.

As we saw from the pros and cons, pawn shop loans are known for their higher interest rates and fees. Payday loans are similarly predatory for their high rates and fees, often leading to borrowers rolling balances into a new loan and falling into a debt cycle.

Some people may consider pawn shop loans “safe,” in that defaulting on the loan will not lead to collection or adverse credit reporting. However, others may consider them risky, since your collateral is lost if you default on the loan or cannot make the payments. If safer financing is available to you, it’s probably best to consider alternative options before turning to pawn shops or payday lenders.

Safer alternatives to pawnbroker loans

If you need cash now to help pay for an emergency or unexpected expense, there are many safer alternatives to pawn shop loans. Here are a few alternatives to consider:

Personal loans

A personal loan is a lump-sum financing option repayable in monthly installments. Rates, terms and loan amounts can vary by lender and lending platform, but Rocket Loans℠ can offer loans of $2,000 – $45,000 to approved borrowers.

Applying for a personal loan requires a credit check and a credit score of at least 650 for good rates and terms, since this kind of loan is typically unsecured (that is, it doesn't require collateral). However, if you have less-than-stellar credit, you might instead apply for a secured personal loan. If approved, you should receive your funds within 1 – 7 business days and be able to start making monthly payments.

Certain borrowers may qualify for same-day funding through Rocket Loans, so it’s possible you could receive your money the day you’re approved.

0% APR credit cards

Some credit card companies offer 0% APR introductory periods when you sign up for a new card. This means that for a period of 12 – 18 months, you won’t have to pay interest on what you owe on that card. This can enable you to get the cash you need without additional borrowing costs.

If you can repay the amount you borrow within that time frame, you can avoid interest altogether. If not, credit card interest rates average around 21% and you’ll be at the mercy of those rates if you go past the introductory period. Because of this, it is imperative that you make a financial plan to repay the amount you’ve charged before the promotional period ends.

Peer-to-peer lending

Peer-to-peer lending is a financing system that lets people or companies borrow from and lend to each other. Lenders can earn a direct return when they offer a loan, which means that they might be willing to lend to someone that doesn’t qualify for a traditional loan. This can make it a good option for individuals with bad credit.

FAQ about pawn shop loans

Here is some additional information if you’re still looking to learn more about pawn shop loans.

Do pawn shops offer title loans?

Pawn shops typically don’t offer title loans because a car’s title isn’t something the store could sell if you can’t repay your loan. Similar to pawn shop loans, title loans require an item as collateral. With title loans, that item is your vehicle’s title, which serves as collateral to secure the loan. Title loan companies will ultimately seize your vehicle if you can’t pay back what you borrowed, plus interest.

What’s the most a pawn shop will loan?

Pawnbrokers typically lend 25% – 60% of your item’s resale value, so your loan amount will vary based on an item’s assessed value. The average amount for a pawn shop loan is around $180.

What are the rules of pawning?

When you go to a pawn shop for a loan, you will bring in a valuable item that could potentially be resold. The pawnbroker will verify your information, appraise the item, and offer you terms on a loan for a percentage of the item’s value. If you do not repay the loan by the time it’s due, the pawn shop may sell your item to satisfy the loan.

What items will a pawn shop not take?

The list of items that a pawn shop will not take varies with each individual shop, but there are a few items that are commonly not options for pawn shop loans. These include stolen or counterfeit goods, broken items, outdated technology, vehicles, or those with low resale value, like old mattresses.

The bottom line: Pawn shop loans offer quick cash with a risk

Pawn shop loans can be an option if you’re confident you can repay the loan in time, but it’s important to keep those high rates and fees in mind, as well as the risk of losing the item you’re pawning. A pawn shop loan can come with a lot of risk for a short-term loan, especially if you could find funding elsewhere. Review all your options before deciding and consider some of the safer alternatives mentioned in this article, like personal loans.

Curious about a personal loan? Get the process started with Rocket Loans and see the rates you prequalify for.

Same Day Funding available for clients completing the loan process and signing the Promissory Note by 4:00PM ET on a business day. Also note, the ACH credit will be submitted to your bank the same business day. This may result in same day funding, but results may vary and your bank may have rules that limit our ability to credit your account. We are not responsible for delays which may occur due to incorrect routing number, account number, or errors of your financial institution.