When you’re short on cash, pawn loans can offer a quick solution.
You can put an item you already own as collateral at a pawn shop, and the store will loan you cash based on the value of the item, without a waiting period or credit check. When you return the money to the store (with interest), you will get your item back.
But, like many short-term loan options, a pawn loan carries many risks. Here’s what you should know before considering a pawn shop loan for extra cash and the alternatives that may best suit your goals.
A pawn shop loan is a type of secured loan. To borrow money, you’ll need to offer collateral: often jewelry, but also collectibles, electronics, musical instruments, and other items.
The pawn shop will appraise your item and lend you a portion of its total value. You must then pay back that amount (plus fees) within a certain time frame, such as 30 days or 90 days.
Some pawn shops may allow you to renew your loan after the original term, as long as you can pay at least the interest already accrued. Otherwise, you will lose the right to your pawned item if you do not pay within the loan term.
Pawn loans can be useful as an alternative to other short-term loans, such as payday loans, which can be even more expensive and have their own risks. They are also relatively accessible to many people. According to the National Pawn Shop Association, the average pawn shop customer often doesn’t have access to traditional bank loans, and since the average pawn shop transaction is less than $180, traditional banks don’t typically offer loans that small.
When you take out a pawn loan, you run the risk of losing the item you put up as collateral. If you decide to pawn something that is personally significant or sentimental, you may have to forfeit the item if you can’t pay back your loan.
While a pawn loan can be helpful in the short term, this type of loan rarely provides a long-term financial solution. According to a 2021 Consumer Financial Protection Bureau report, borrowers who used pawn loans in a given year continue taking these loans the following year, as do borrowers who switch between auto title loans and payday loans.
Constantly using small, short-term loans can be a risky practice. Not only are you not building credit (so you may qualify for other types of loans like mortgages or auto loans), but you can also rack up significant fees.
Cost is one of the biggest risks of pawn loans. High fees make these loans much more expensive than simply paying back the amount borrowed.
Many states regulate the fees that pawn shops can charge borrowers. For example, New York has a maximum interest rate of 4% per month for pawn loans, and Ohio caps pawn loan rates at 6% per month. But even those capped rates are much higher when we consider them on an annual basis, like other loans.
Take Georgia as an example. The state caps interest on pawn loans at 25% for the first three months and then 12.5% ​​after that. That’s a combined annual interest rate of 187.5%, much higher than you would see on personal loans or credit cards.
But what does that look like in the real world? If you have a $300 pawn loan at 25% interest with a term of three months, you could pay up to $225 in fees during that time ($75 per month). That means you would owe the pawn shop up to $525 on your original $300 loan.
One of the benefits of pawn loans is the lack of credit checks. But even if you don’t have good credit, you can still access less risky loans or lines of credit. Here are some to consider:
A good credit score is often necessary to take out a personal loan, especially loans with low fees and interest rates. But it is possible to get approved for a personal loan with bad credit. Look beyond the big banks and look for community banks, credit unions or online lenders that can offer more flexibility. Some credit unions, for example, offer payday alternative loans (PAL) with rate caps and terms lasting up to six or 12 months.
Even if you don’t qualify for the best terms or interest rates based on your credit history, you may be able to access the funds you need with a personal loan. Once you’re approved for a loan, you’ll receive a lump sum payment and begin paying what you owe (plus interest) in standard monthly installments.
If you can’t get approved for a personal loan based on your own credit history, consider a secured personal loan or applying for your loan with a co-signer.
Read more: The best personal loans for bad credit
A secured credit card can give you access to a line of credit and a way to build your credit score. Secured credit cards require an upfront refundable deposit that typically serves as your credit limit. The minimum deposit for many secured cards is around $200, so you need some extra money to open one.
Over time, you can use your card to make purchases and build credit by paying at least the minimum amount due on time each month. Many secured card issuers monitor your account to determine if you qualify to upgrade to an unsecured card and get your deposit back.
These are some of today’s top secured credit cards: