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? With pawnshop loans, you stand to lose the item you left with the pawnbroker. Depending on what you put up for collateral, that could be a big loss for you.
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. During the U.
Pawnbrokers typically give out small loan amounts even if the item you are pawning is worth more. How much did that iPad cost you in the first place? The amount of interest and fees a pawnbroker can charge varies from state to state, but it can be pretty high. Additionally, pawn loans charge a finance fee instead of an annual percentage rate APR , and they can be very expensive. In comparison, the average personal loan charges a rate of around 9. But there are a few cases where a pawnshop loan can really help you, like when:.
Do the positives work for your situation? Are you able to handle the downsides of pawnshop loans? If so, then you might be OK with getting a pawn loan. You may consider:. Lindsay VanSomeren is a personal finance writer based out of Kirkland, Washington. Jordan Tarver is the assistant editor for loans at Forbes Advisor. Before joining Forbes Advisor, Jordan was an editor and writer for multiple finance sites, focusing on loans, credit cards and bank accounts.
His goal is to create actionable content that enables people to make sound personal financial decisions. When he is not working on personal finance content, Jordan is a self-help author and world traveler who helps people experience the world and discover themselves.
Select Region. United States. United Kingdom. Lindsay VanSomeren, Jordan Tarver. Contributor, Editor. Editorial Note: Forbes Advisor may earn a commission on sales made from partner links on this page, but that doesn't affect our editors' opinions or evaluations.
Pawnbroking imposes a discipline on the borrower that other lenders do not. Pawn loans do not cause people to overextend credit or go into bankruptcy. Loan amounts vary according to the value of the item.
There is no minimum dollar amount allowed on a pawn transaction but the maximum amount may be set by state pawn laws. Your loan amount will be determined according to other factors as well such as demand and condition of the item. Not all pawn stores are the same and price will vary. Pawn shops base the value of the item on current appraised value, its current condition and the ability to sell the item.
The appraisal process varies depending on the type of item—for example, jewelry is evaluated differently than a DVD player.
All items that pawn shops buy or pawn are tested to ensure that they work properly. This information is then regularly transmitted to law enforcement, which dramatically decreases the likelihood that a thief would bring stolen merchandise to a pawn store. Yes, Pawnbrokers are governed by all of the major federal laws that apply to entities designed as financial institutions.
Pawn shops may also be Federal Firearms License holders. The amount a pawn shop is willing to lend is based primarily on the value of the item, but it can also be substantially affected by the pawnshop's current inventory at the time of the loan.
For example, if a person is looking to borrow money using a television as collateral and the pawnshop's inventory is already overflowing with similar televisions, it will generally offer to lend considerably less money than if it were low on inventory for televisions.
Pawnshops make loans at substantially higher interest rates than banks typically charge for personal loans. The risk of loan default is much higher, and many individuals seeking loans from a pawnshop cannot qualify for traditional bank loans. State law governs the amount of interest that a pawnshop is allowed to charge, and regulations vary widely from state to state.
Loans are generally made on a monthly or day basis. By the end of the month, to avoid forfeiting the property put up as collateral, the individual must either pay back the loan in full plus the interest charge or simply pay the monthly interest charge, which allows the individual to extend the loan for another month. Pawnshops are generally willing to extend loans indefinitely as long as the interest is being paid, as they may eventually collect more in interest charges than the amount of the loan itself, while still holding the loan collateral against default.
Should you find yourself in need of a small personal loan and are unable to provide any collateral, or if you are hesitant to work with a pawnshop, there are several unsecured options that may fit the bill. The second primary source of income for a pawnshop is retail sales. Merchandise includes items that the pawnshop has purchased outright from individuals and items that were pledged as collateral by loan customers who then subsequently defaulted on their loans, thereby forfeiting the pledged collateral property to the pawnshop.
Items that the shop eventually acquires through loan defaults may offer them higher or lower profits in the end, depending on the items and the length of time the loans were carried prior to default. If a loan was maintained for a lengthy period of time, the pawnshop may have already made a profit just from collecting the interest payments made prior to default. However, the length of time may also mean that the item has deteriorated in value to the point where it has little or no resale value.
Pawnshops commonly supplement their income by offering auxiliary services for which the shops charge fees. Typical extra services offered by pawnshops include check cashing, cell phone activation, Western Union or other money transfer services , and bill payment services.
National Pawnbrokers Association. Loan Basics.
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