If your car breaks down, you need to pay for surgery or another medical treatment or a home appliance suddenly stops working and needs replacement, how would you pay to fix the problem? Four out of 10 people in the U.S. would have difficulty coming up with $400 cash to cover an unexpected expense, such as vehicle repair or a medical bill! If you need cash as soon as possible, borrowing money is an option. But banks traditionally don’t offer personal loans for small amounts, and the cost of using a credit card can be steep.
A pawn shop loan can be an option when you need cash quickly and have something of value to put up as collateral. As with any type of loan, there are benefits to getting a pawn loan and a few drawbacks to know about. Whether you need cash now or might need money in the future, learn more about how pawn loans work and why getting one might be the right choice for you.
How Do Pawn Loans Work?
If you get a car loan or a mortgage, your vehicle or home serves as collateral against the loan. The car or home gives the lender something to fall back on and some protection if you stop making payments on the loan. When a person stops paying a car loan or mortgage, the lender has the right to claim the property or collateral.
Pawn loans are also collateral loans. When you visit a pawn shop to get a loan, you bring with you something valuable to offer as collateral. Pawn shops accept a wide range of items as collateral, from video game consoles to luxury watches and from firearms to designer handbags. You give the item to the pawnbroker, and they assess its worth and offer you an amount to borrow. If you agree to the loan, you get the cash, and the pawnbroker keeps the item. If all goes well, you return at the expiration of the loan with the cash you borrowed, plus any interest and fees owed. You pay the pawnbroker the cash and get your item back.
Although pawn loans have collateral in common with mortgages and car loans, they are different from the type of loan you’d get from the bank in several notable ways.
- They don’t require a credit check: Traditional lenders often check credit to assess the likelihood of a person paying back the loan. Credit checks can make it difficult for people with bad credit or a limited credit history to get a bank loan. For a pawnbroker, the risk of loss is much lower if someone doesn’t come back to pay off their loan. Since the pawnbroker already has the item in their possession, they can sell it and recoup the money lost on the loan that way.
- They are short-term: Usually, you have 30 days to pay back the amount of the pawn loan plus interest and fees. If for whatever reason, you can’t repay after 30 days, you can extend the term of the loan by paying the interest and fees owed. Personal loans from a bank are usually much longer, often requiring payments for five years.
- They can be for small amounts: It is very unlikely that a bank will give someone a loan under a few thousand dollars. The cost of the application and approval makes micro-loans not worthwhile for traditional banks. But it is possible to borrow a small amount with a pawn loan, even as little as $10, yet all the way up to thousands and even tens of thousands depending on the item used for collateral. How much you can borrow depends on the value of the item you are pawning.
- They won’t affect your credit: If you can’t pay back a credit card, personal loan or mortgage, your credit will take a hit. Since pawn loans do not require a credit check and aren’t reported to the credit bureaus, your credit history won’t be affected if you are unable to pay back the loan. The most that will happen is that you will lose the item you pawned.
Each state in the U.S. has specific rules regarding pawn loans and the information a pawnbroker is required to get from a person pawning an item. The states also set rules concerning the length of the loan, when a pawnbroker can sell an item and how much interest they can charge.
If you are hoping to get a pawn loan in Virginia, you need to provide identification such as your driver’s license or another form of government-issued ID. The pawnbroker will also take down a description of you and make a copy of the identification you provide.
When you get a pawn loan, the shop will provide you with a pawn ticket. The ticket is essential if you plan on paying the loan and getting your item back. Listed on the ticket will be a description of the item you pawned, the amount of the loan, the interest rate, the amount of any fees and the date of the transaction. Keep the ticket in a safe place as you’ll need to show it or your ID when you return to pay back the loan and claim your item.
The pawn shop might offer a grace period of five days after the loan expires for you to claim the item without a late fee. In Virginia, a pawnbroker needs to hold an item for 15 days after the loan expires before they can sell it.
Pros and Cons of Pawn Shop Loans
If you can’t get a traditional loan from a bank or only need to borrow a small amount of money, a pawn shop loan offers several advantages. That said, there are some important considerations to keep in mind before you get a pawn loan.
Pros of a Pawn Shop Loan
Some of the pros of a pawn loan include:
- They are quick: Most traditional bank loans require a lengthy application process. The application can keep you from getting the cash you need right away. With a pawn loan, you get the cash immediately after the pawnbroker accepts your item and agrees to the deal.
- There’s no credit check: Your credit history has no effect on your ability to get a pawn loan, the type of interest rate you’re offered or the fees you pay.
- You don’t have to worry about collections: The item you pawn is the collateral on the loan. If for whatever reason, you’re unable to repay the loan, the pawnbroker won’t report you to the credit bureaus or send your loan to collections. Instead, the collateral item will step in as payment on the loan.
- You won’t need a co-signer: With a traditional bank loan or credit card, you may need someone to act as a co-signer if you don’t have a good credit history yourself. The co-signer becomes jointly responsible for the loan, which can put their credit at risk. Since pawn loans don’t involve a credit check, there is no need to find another person to vouch for you or accept responsibility for the loan.
- Pawn shops are regulated by the state: Every state has its own set of rules regarding what pawnbroker can or can’t charge for loan, how long a loan can be and when the pawnbroker can sell unclaimed items. If you work with a licensed pawnbroker, you can rest assured that they will follow the rules.
- The pawnbroker will keep your item safe: During the period of your loan, the item will be stored in a secured area and kept safe.
Cons of a Pawn Shop Loan
There are some potential drawbacks of a pawn loan, such as:
- You have to pay interest and fees: Anytime you borrow money, you need to pay for the privilege, usually in the form of interest and fees. Pawn shop loans are no different. Each state sets limits on how much a pawnbroker can charge in interest and fees, though.
- You might lose the item: If you can’t pay back the pawn loan, you end up forfeiting the item to the pawn shop. Depending on the value of the item, both financial and sentimental, losing it can be a big blow.
- The amount you borrow isn’t the full value of the item: If you’re looking to sell a valuable item, such as fine jewelry, you might find that you get a better price for the item if you sold it yourself on the private market, although that can sometimes be risky. However, if you are looking to use the item as collateral and plan on repaying the loan to get it back, not being offered the full market value of the item shouldn’t be an issue.
What Interest Rates Do Pawn Shops Offer?
The amount of interest a pawn shop can charge on a loan varies from state to state. In addition to charging interest, some states also let pawn shops charge fees when they loan money.
Since a pawn shop won’t use your credit history when deciding to accept your item and loan you money, it won’t use your credit history when determining the interest rate to charge you. Instead, the rate is most likely going to be based on the size of your loan. The more you borrow, the lower the interest rate. Small loans usually have higher rates. For example, a $10 loan will have the highest cost in relation to the amount of money you borrow.
Unlike other types of loans, the interest on a pawn shop loan doesn’t compound or get added to the principal. If at the end of the 30-day period, you find that you don’t have the cash to pay your loan back, you can extend the term for another 30 days. To do so, you simply need to pay the interest owed for the first 30 days.
In addition to the interest rate charged, a pawnbroker might charge a service fee or storage fee. When you pawn an item, all of the fees and interest charged on the loan should be listed on your pawn ticket. The list should be itemized so you can clearly see what you need to pay. If you lose your ticket, the pawn shop might charge you a lost ticket fee, but only if it informs you of that at the beginning.
Should I Get a Pawn Loan?
Getting a pawn loan might be the right option for you in some situations. Some reasons to get a pawn loan include:
- You need a small amount of cash right away: When you pawn something, you get cash for the item right away. Most pawn loans are for small amounts and can help you make up a shortfall in income one month or hold you over until payday if you have a surprise expense.
- You don’t have an existing relationship with a bank: In the U.S., 6.5% of households are unbanked, meaning they don’t have a pre-existing relationship with a traditional financial institution. Additionally, 18.7% of households are underbanked, meaning they might have a checking or savings account but don’t use other bank services. If you don’t have an existing relationship with a bank, the process of getting a personal loan can be long and complicated. A pawn loan can be a suitable alternative.
- Your credit isn’t so great: You don’t have to worry about being turned down for a pawn loan because of your credit history, as credit never even enters into the equation. Your credit will also have no impact on the interest rate you’re offered or on other terms of the loan.
- You have something of value to pawn: For a pawn loan to work, you need to have something of value to offer the pawnbroker. A musical instrument, piece of jewelry, firearm or video game system are all examples of items you might be able to pawn. The condition and age of the item, as well as how much a pawnbroker thinks it will sell for, all influence the amount of your loan.
- You don’t want to affect your credit: Perhaps you have excellent credit and are planning a making a major financial move in the near future, such as getting a mortgage. You don’t want to do anything that might affect your credit, such as take out a personal loan or open a new credit card. But you need cash right now. Getting a pawn loan can make sense for you. Since the pawnbroker won’t pull your credit and the loan won’t appear on your report, you won’t risk having your credit take a hit.
- You wouldn’t be heartbroken if you didn’t get the item back: While the large majority of people who pawn items do pay off the loan and retrieve the item they pawned, you may not be able to repay the loan and could lose whatever it was you pawned. For that reason, it’s best to pawn items that have little or no sentimental value to you.
Contact The Vault Jewelry and Loan If You Need Cash Today
If you need cash today and have an item or items to pawn, The Vault Jewelry and Loan can offer you a fair price for your items. Depending on the item on offer, our loans range in value from $10 to over $100,000 and are for 30-day terms. If you need to, you can renew the loan every 30 days by paying the interest and fees owed. Once you take out a loan with us, as long as you keep in contact with us, we are willing to hold your items much longer than 15 days past the due date if you need us to. We want our customers to have every advantage before we put something out for sale that they intended to get back. People forget, other things pop up, and life is complicated. We are here to help and work with you.
To learn more about our pawn loans and process, contact us today.