Are Pawnshop Loans Worth It?

This post originated at Forbes.com and contains their affiliate links. 

If you need cash fast and you don’t have the credit needed to get a good personal loan, you might be thinking about alternative lending products. These are things like payday loans, auto title loans and pawnshop loans.

None of these products are particularly great, and it’s best to use them as a last resort. But if you had to choose one, pawnshop loans are the least damaging financially because they can’t affect your credit. They’re not a fail-safe, though, and they have their limits.

What Is a Pawnshop Loan?

A pawnshop loan is a type of secured loan, which means it’s backed by collateral. In this case, that’s the pawn—the item you bring in and leave with the pawnbroker. If you pay off the loan in time, you’ll get your pawn back. But if you don’t, the pawnbroker gets to keep the pawn and put it up for sale in their shop as payment for the loan.

As long as you have something of value, pawnshop loans have no other qualification requirements. That’s their strength; unlike other loans, which rely on checking your income and your credit, you could walk into a pawnshop with no income and no credit and still get a loan.

In fact, pawnshop loans are one of the oldest forms of lending for this reason. After all, our ancestors didn’t have FICO scores or pay stubs to prove their creditworthiness to lenders, and so they used a collateral-based system like this.

How Do Pawnshop Loans Work?

First, you’ll find an item of value and bring it into the pawnshop. Keep in mind that it needs to be something with a high resale value and that can be easily sold to the general public. Your book collection might have cost you a lot, but it’s unlikely the pawnbroker will be able to get much for it, for example. Popular pawn items include jewelry, power tools, firearms, musical instruments and electronics.

The pawnbroker will ask questions about your pawn to assess its value and to make sure you actually own it (thieves frequently use pawn shops to turn stolen items into cash). Then, they’ll ask if you want to sell it or pawn it.

If you pawn it, they’ll offer you a loan based on its worth. You can typically expect a loan of 25% to 60% of its resale value (Important: the resale value is usually much lower than what you paid for the item when it was new!). Additionally, pawn loans charge a finance fee instead of an annual percentage rate (APR), and they can be very expensive. The regulations vary widely by state, but when you do the math, you could be paying the equivalent of anywhere from 13% to 1,300% APR. In comparison, the average personal loan charges a rate of around 9.65% APR.

Let’s say, for example, your pawn has a resale value of $1,000. The pawnbroker offers you a loan that’s 25% of its resale value ($250) with a financing fee of 25%. Not only will you owe $250 in principal, but you’ll also owe $62.50 in financing fees. This means you’ll owe a total of $312.50 on a $250 loan.

With all things considered, if you accept your loan, you’ll get the cash immediately, and the pawnbroker will give you a pawn ticket, a receipt for what you’ve pawned. Make sure you don’t lose it because you’ll need it to reclaim your item later.

The pawnbroker will tell you when you’ll need to return to repay the loan and reclaim your item, usually within 30 or 60 days. If you don’t return by that date, the pawnbroker will simply keep your item and put it up for sale in the shop. There’s no penalty for not paying by the due date, since your collateral is then used to repay the loan for you.

When Are Pawnshop Loans a Smart Move?

If you need money, it’s almost always better to apply for a loan through more traditional sources. That way you’ll save money, build credit and potentially access a larger amount of money if you need it. But there are a few cases where a pawnshop loan can really help you, like when:

• You need cash immediately. Some personal loan lenders offer same-day funding. But if you need money almost instantly, you can walk into a pawnshop and get cash in minutes.
• You only need a small amount of cash. Pawnshops generally only accept small items, and only offer loans for a fraction of their value. So, the most you might be able to get is a few hundred dollars.
• You have an item of value that you’re OK with potentially losing. If you’re not able to pay off the loan by the due date, you could lose your item for good. That’s how some people end up losing important family heirlooms.

Pros and Cons of Pawnshop Loans

If you’re considering this type of personal loan, use the list below to guide you. Do the positives work for your situation? Are you able to handle the downsides of pawnshop loans? If so, then you might be OK with getting a pawn loan.

Pros of Pawnshop Loans

• Quick funding: You can walk out of the pawnshop with the money in a matter of minutes.
• Doesn’t affect your credit: You don’t need good credit (or any credit, in fact) to get a loan. And if you don’t pay, you also won’t see a hit to your credit score either.
• No hassles from creditors if you don’t pay: You won’t be referred to collections or hounded by creditors if you don’t pay the loan. In that case, the pawnbroker simply claims ownership of your pawn and sells it to recoup the cash.

Cons of Pawnshop Loans

• Potentially expensive: Considering the financing fee that comes with pawn loans, they can be drastically more expensive than a traditional personal loan. Take this into account when deciding whether this is the right financing option for you.
• Loans are very small: The average pawn loan is $150 and lasts 30 days, according to the National Pawnbrokers Association. To find out how much you might be able to get for your loan, figure out your item’s resale value, and then multiply it by 0.25 and 0.60—this is the range you could expect to get.
• You can lose your pawn: If you lose your pawn ticket, you won’t be able to get your pawn back. If you don’t pay the loan off by the due date, you could lose your pawn too. This is how a lot of people lose their grandmother’s wedding ring, for example.
• Doesn’t build credit: Since pawn loans don’t report to the credit bureaus, they also won’t help you build credit. Without credit, you’ll have a harder time renting or buying a home, qualifying for better loans and credit cards or even getting a job in some cases.

Alternatives to Pawnshop Loans

If you’re in a pinch and you’re not able to apply for a more traditional loan, pawnshop loans aren’t your only option. You may consider:

• Asking for an extension. It can sting to ask, but if you have bills due, often companies are willing to work with you if you’re running into a temporary financial snag.
• Finding help from a charity. 211.org is a great resource for finding local charities that can offer temporary help, especially for disadvantaged folks. The money is meant for you to use; make sure you take advantage of it if it’s there.
• Selling something. Pawnshops aren’t the only place you can sell things. You can often get much better prices through Craigslist, Facebook Marketplace, OfferUp or other marketplaces if you can wait a few days to find a buyer.
• Signing up for a side hustle. Many side hustles let you sign up and start making money right away, such as Uber (and Uber Eats), Rover, TaskRabbit, transcribing and mystery shopping.
• Finding a Payday Alternative Loan (PAL). Some credit unions offer these small-dollar loans to their members. These loans do help build credit and don’t charge outrageous fees, and so they can be a great option.
• Saving up an emergency fund. This won’t help you if you need help today, but now’s a great time to think about starting up an emergency fund if you have the means. That way, the next time you land in a rough patch, you’ll have a cushion to catch you.