How Do Pawn Shop Loans Work and Alternatives to Consider
While pawn shop loans can provide you with the funds you need quickly, they can quickly get expensive. The good news is there are a number of alternatives such as personal loans and credit cards that come with lower interest rates and fees. Here's how pawn shop loans work and some alternative options you can consider.
What are Pawn Shop Loans and How Do They Work?
Pawn shop loans are short-term loans that are secured with something valuable you own, like a guitar or a piece of jewelry. If you opt for a pawn shop loan, your loan amount will be based on the value of the item you decide to pawn.
If you own a diamond ring, for instance, you can bring it to a pawn shop loan to get fast cash. Once the pawnbroker determines the ring’s value, they may offer you a loan that can range between 25% and 60% of its value. You can accept the loan and agree to repay the loan in one lump on a future date. If you do not repay the loan, the pawn shop keeps your property.
Drawbacks of Pawn Shop Loans
As with all financing products, pawns shop loans come with several disadvantages including:
High Interest Rates
If you take out a pawn shop loan, you’ll likely have to pay a high-interest rate. Depending on the loan, you may owe interest charges ranging from 5% to 25% a month. This can cause your loan to become very expensive and much harder to pay off.
In addition to high-interest rates, you may be on the hook for other fees that cover costs such as origination, appraisal, insurance, and storage. These additional fees can significantly increase the cost of your loan.
Risk of Losing Collateral
If you don’t repay your loan on time, there’s a good chance the pawn shop may sell your item. This can be a big drawback, especially if your item has sentimental value or is something you hope to use again in the future.
Alternatives to Pawn Shop Loans
If you want to avoid getting a pawn shop loan, here are some alternative options you can look into.
With a personal loan, you receive a lump sum of money and pay it back with interest via fixed monthly payments over an agreed upon term. There are a variety of personal loan options and many of them are more affordable than pawn shop loans.
If you get approved for a credit card, you’ll be able to spend as much or as little as you’d like up to your set credit limit. Once you rack up a balance, you’ll need to make at least the minimum monthly payment every month. If you don’t pay your balance in full, you’ll face interest charges.
If you currently have a job, your employer may offer a payroll advance and give you a portion of your pay before your next payday. Note that not all employers are open to payroll advance, so this option may not be available for you.
Selling Unused or Unwanted Items
Chances are you have unused or unwanted items lying around your home. You can sell them on places like Facebook Marketplace or Craigslist. If you go this route, keep in mind that it may take some time to receive the cash.
Help from a Family Member or Friend
Your loved ones may give you financial help in times of need. If you need money to cover an unexpected expense, don’t be afraid to ask a family member or friend for help. Be sure to put your repayment plan in writing so that everyone is on the same page.
Should You Consider a Pawn Shop Loan?
While pawn shop loans can get you cash quickly, their high-interest rates and fees make them a very expensive option. Advance America offers alternatives like payday loans and installment loans. You can apply for these loans from the comfort of your own home and get approved quickly, even if you don’t have great credit.