Managing rent, insurance and other monthly expenses can be overwhelming, especially when money is tight and youâ€™re waiting on your next paycheck. Add an emergency into the mix and you may be looking for some financial help.
But youâ€™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. Hereâ€™s what to consider.
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 youâ€™re approved for a pawnshop loan, youâ€™ll receive a pawn ticket that will outline your loan terms and amount, as well as other information. When your loan term is up, youâ€™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 wonâ€™t pay interest, you may have to pay a pawn service fee up to $300.
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, theyâ€™re a safer loan product. Hereâ€™s more information on the two.
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:
Donâ€™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 youâ€™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, donâ€™t shy away from reaching out to them.
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