Saturday, 16 October 2021

The Difference Between Pawnshop Loans and Personal Loans

The Difference Between Pawnshop Loans and Personal Loans
14 Sep

pawnshop loan vs. personal loaniStock

Managing rent, insurance and other monthly expenses can be overwhelming, especially when money is tight and you’re waiting on your next paycheck. Add an emergency into the mix and you may be looking for some financial help.

But you’ll want to be cautious about where you go for assistance. You may be weighing between a pawnshop loan and a personal loan, but these two products have some key differences. Here’s what to consider.

How do pawnshop loans work?

Securing a pawnshop loan is a different process from applying for a loan at a bank.

If you want a pawnshop loan, you have to bring in an item to use as collateral. The pawnshop will evaluate and appraise the item to determine the loan amount for which you qualify. Pawnbrokers will also consider their ability to sell the item.

The average pawnshop loan is $150, according to the National Pawnbrokers Association. But the value of your collateral and your state will determine the maximum amount of money you can borrow. You can expect a pawnshop loan to be for up to half the value of your collateral.

Once you’re approved for a pawnshop loan, you’ll receive a pawn ticket that will outline your loan terms and amount, as well as other information. When your loan term is up, you’ll have to repay the borrowed amount to reclaim your collateral. If you fail to repay your loan, your collateral will be seized and sold.

Pawn Shops Today reported that customers recover more than 80% of collateral that is used to secure a pawnshop loan.

When it comes to interest and fees, pawnbrokers are a far pricier option compared to personal loans. According to the National Consumer Law Center, between interest and fees, you could be paying upward of 200% APR. But pawnshops are regulated by the state in which they are located, so the interest rates and fees will vary.

For example, in Wisconsin, pawnbrokers are not allowed to lend more than $150 to a customer, and the interest rate cannot be more than 3 percent per month. In Texas, pawnbrokers can lend up to $2,500. While you won’t pay interest, you may have to pay a pawn service fee up to $300.

Risks of pawnshop loans

  • Loss of collateral: A loan that requires collateral is always a risk. If you don’t repay your loan, you could lose your collateral. With a pawnshop loan, however, your risk is greater since you can only get a loan for up to half the value of your collateral.
  • Unreasonably short terms: A pawn loan typically is between 30 to 90 days. That could make it difficult to pay back your loan.

Benefits of pawnshop loans

  • No credit check: Most lenders run credit checks on their applicants. Besides a review of the applicant’s employment and income information, a credit check is used to help a lender determine the likelihood of the applicant being able to repay the loan. Since you’ll put down collateral, a pawnshop loan won’t require you to have good credit to qualify.
  • No impact on credit score: With a personal loan, your lender will report your payments to the major credit bureaus. If you struggle to make on-time payments, your credit score could take a hit over time. Pawnbrokers do not report any information on loans or payments to the credit bureaus, so a pawnshop loan will not affect your credit.

Pawnshop loans vs. personal loans

As a rule of thumb, you should avoid pawnshop loans. Their high rates and fees mean you pay a high cost for a small amount of money. Although personal loans are harder to qualify for, they’re a safer loan product. Here’s more information on the two.

Pawnshop loans

  • Loan amounts: Pawnshops are not the place to go if you need a significant amount of money since pawnbrokers can only offer small loans.
  • Collateral: You’ll need collateral to secure a pawnshop loan. The amount of the loan is based on a percentage of the value of the item.
  • Repayment: Repayment of a pawnshop loan is not required, although it’s highly recommended. If you don’t repay the debt, the pawnbroker could seize the collateral.
  • Terms: Pawnshop loans tend to have short terms, typically between 30 and 90 days.

Personal loans

  • Application: To secure a personal loan, you’ll work with a bank, credit union or online lender. An application must be filled out online, in person or over the phone. You’ll submit to a credit check and provide some income and employment information.
  • Credit check: A traditional lender will assess your creditworthiness and have a minimum credit score it’ll approve. But you may be able to find personal loans for bad credit.
  • Loan amounts: Personal loan applications have access to various loan amounts.
  • Collateral: Collateral is not a requirement for all personal loan lenders, but it is not unusual for lenders to request it.

Alternatives to pawning

A pawnshop loan may be easy to qualify for, but it comes with a lot of risks. Between high rates and fees and the potential to lose your collateral, a pawnshop loan can leave you in worse shape than you started.

Consider these alternatives:

  • Auto title loans: An auto title loan is secured by the value of your car. Similar to a pawnshop loan, an auto title loan typically does not require a credit check and the amount is based on the value of the collateral. But you get to continue using your car during repayment.
  • Payday loans: A payday loan is a short-term loan or cash advance that requires you to write a check to the lender or agree to an electronic payment that will be used to repay the loan once the term has expired, which is typically on your next payday. Payday loans have high rates, though, and lead you into a debt trap.
  • Personal line of credit:A personal line of credit is an unsecured loan available through banks and credit unions. It is similar to a credit card since you’re provided with a credit limit and are required to make monthly payments with interest (if there is an outstanding balance). You may only be able to access a personal line of credit through your bank.

Don’t panic if you run into financial trouble. You have various options for managing your money. But be wary of pawnshop loans. They can leave you in a worse financial position if you’re unable to repay them.

Consider your alternatives. A personal loan may be a safer choice. And if you have friends or family who could help, don’t shy away from reaching out to them.

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Kristina Byas

Kristina Byas |

Kristina Byas is a writer at MagnifyMoney. You can email Kristina here


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