How do Pawn Shop Loans Work

Are you desperate for some quick cash and have valuable items like family heirlooms, musical instruments, and other used merchandise? Pawning can be the easiest way to secure the money you need.

Even though many people consider pawn shops a place to buy overpriced antiques and showpieces, pawnshops are one of the most important alternate methods to manage personal finances in the US.

So how do pawn shops work really? Let\’s find out more about pawn shops and their loan process in this blog post.

What is a pawn shop loan and how do they work?

Pawnshop loans are typically short-term loans that you can get from a pawnshop. The loans that pawnshops provide require absolutely no credit score checks or the usual complex paperwork and interrogations. The only thing you need to get a loan from a pawn shop is a valuable item as collateral, for example, jewelry or maybe a branded guitar, as a security pledge. Pawnshops will then examine the item for its authenticity and true market value before issuing a quick loan based on the price.

The amount of loan and the interest rate vary greatly according to the price of the item resale. Most of the lent money is equivalent to 25% – 60% of the item\’s resale value. To redeem the pawned items, the borrowed amount has to be paid by the customer along with interest and additional fees if required. The time period for the payment is also decided beforehand and is usually flexible.

What are the requirements for a pawnshop loan?

Unlike bank loans, pawnshops do not really care about the financial history of the customers. Thus, there are no requirements for credit score checks, complicated paperwork, or any kind of investigative interviews to make sure that the customer will be able to repay the loan.

Pawnshops however require collateral as a pledge of security. In case the customer doesn\’t pay the loan back, the shop can sell the pawned items and recover the loan money easily. With the collateral, pawnshops may also require a government ID of the customer along with a photograph of the collateral and the customer to make sure that the item is legit and that it actually belongs to the customer pawning it.

What are the things that you can pawn? 

There are a lot of things that your can pawn. The main requirement for pawning is that the item should have a resale value and it should be authentic. Every item is evaluated differently and the loan amount is decided accordingly to be given as cash.

Among all the items that you can pawn to make some quick cash, some are;

  • family heirloom
  • musical instruments
  • antiques
  • jewelry
  • collectible
  • vehicles like cars and motorcycles
  • electronics
  • furniture
  • gaming systems like Nintendo Switch and PS4
  • guns and ammunition

7 benefits of taking a loan from pawn shops

Why take a loan from pawnshops (that are stereotypically considered to be \’shady\’) rather than taking a personal loan from a bank? Well, here are the 7 benefits of a pawn shop loan that make it a better alternative.

Quick cash

Pawn shop loans are the easiest way to get some quick cash when you are in need of money. Unlike a personal loan from the band that takes weeks to process, pawn loans are way faster and simple. Most pawn shops take collateral as a security pledge from their customers and then give them a certain loan amount. The quickness of the process is what makes the pawn loan a very popular way to borrow money.

As long as your collateral item is actually valuable and can pass the authenticity check run by the pawn shop, you will be able to walk out of the shop with some cash in your hand.

No credit checks

Pawnshop deals do not depend on a person\’s financial history which is why there are no requirements for credit score checks. The only that the pawnshops work with is the value of the item that is being pawned. So, as long as you bring in an authentic item that has a high sale value, you will get a loan.

No complicated paperwork and interrogations

The reason that band loans are so time-consuming is that they consist of complicated paperwork, credit score checks, and nerve-wracking interrogation processes. The process starts with a pre-approval stage where the bank decides if you are eligible for a loan or not. This is followed by a lot of paperwork to prove your financial capacity and then interviews and surveys by the bank officials.

Most pawnshops however only have a single loan agreement that states all the terms and conditions of your short-term loan. Pawnshop loans can spare you of the stress of bank loans.

Don’t impact the credit rating

Another biggest concern of taking a loan from a bank or a microfinance agency is that it will affect your credit scores negatively in case you cannot pay back the loan amounts or pay it late. And when your credit score is negative eventually, you will lose the chance to buy larger sums from the bank in the future.

Pawn shops however do not run checks on credit scores. Thus, the loans that your take from a pawn shop doesn\’t affect your credit score. This is why pawn shop loans become one of the best alternatives to bank loans when it comes to a short-term loan so when the time comes you can borrow bigger sums from the bank without any credit concerns.

The only consequence; losing the item

Managing your personal finance while living in the US can be difficult for some people as a vast majority of the population struggles there financially. This is why secured short-term loans are a popular way to provide support to people who are in dire need of money. However, not everyone has the capacity to pay their loan amounts back. This can put them in a sticky situation when the loan is from a bank.

Pawnshop loans however run on the basis of pledging security over goods, mostly personal property of the customer. Thus, the only consequence of not being able to pay the loan back is that the customer will lose their collateral item. The item is then sold by the pawn broker and the loan amount is recovered.

The collateral is safe and secured

Most pawn shops keep the pawned items safe and secure. The pawn shops might have security cameras and bulletproof glasses so that your collaterals stay safe from any kind of theft or burglary.

Pawn shops return the collaterals in the same condition as they were before which is why they try to maintain the item in the best ways possible. In case there is any damage to your collateral or the pawn shop loses the item somehow, you can always use the agreement to get a refund or report the incident to local authorities.

Reasonable interest

Most pawnbrokers lend money on a monthly interest basis. The interest rates vary according to the value of the pawned item. The longer you take to repay the loan, the more profit pawn shops make. However, the agreement that you sign during the pawn transaction might have a specific time period mentioned in it. Pawn brokers are also known for giving extensions on pawn shop loans.

Common misconceptions about Pawnshops 

Even after so many unbeatable benefits of pawn shop loans and the simplicity of the pawn loan process, there are certain misconceptions about pawn shops. As a common stereotype, pawn shops are associated with poverty and people with low credit scores. Because of these common misconceptions, many people tend to accuse pawn shops of various things. Here are some of the most common misconceptions and their reality;

Pawn shops rip people off

 The most common misconception about pawn shops is that they try to rip their customers off as they operate through evaluating the items rather than giving you the current appraised value of it. Now it is important to remember that appraisals are different from evaluations. Appraisals are the replacement value of an item while evaluation helps pawn shops decide the resale value of the item.

Pawn shops buy and sell used items. So, it is natural that they cannot give you the full price of an item as that will cause them to go out of business. However, like any other business, they too want the best for their customer which is why they will give you the best possible value for any item you pawn. They also give the loans for flexible periods to make sure that the customer has plenty of time to repay the loan.

Pawn industry makes most of its profit from the loans rather than selling off the pawned items as almost 80% of the loans are paid back. Pawn shops also make ongoing relations with the customers as most people pawn the same item again and again.

Pawn shops sell stolen merchandise

Another common misconception about pawn shops is that they sell stolen merchandise. Pawnbrokers are just human beings. They cannot read minds and tell if their customer is a thief. Thus, the only way they get to know if the pawned item is stolen is through the police. As surprising as it may sound, police work very closely with pawn shops. When an item is stolen, police check for the most common places where the thief could have sold the item, pawn shops. Thus, as proof, pawnbrokers keep a copy of government ID, a photography of the item, and the customer. This evidence can help the police investigate stolen items easily.

Pawn shops aren\’t allowed to sell pawn items outright. There is usually a two-week period that the pawnbroker has to wait out before selling it to ensure that the police had enough time to investigate a missing item.

Most pawnbrokers are associated with the national pawnbrokers association. The association enforces strict operating guidelines on its members, in exchange for the legitimacy associated with the membership. As a result, if you choose a pawnbroker associated with the National Pawnbrokers Association, you can rest assured that there will be no shady business.

Pawn shop loan interest rates are too high

High loan interest rates of pawn shop loans are a myth because the pawn shops you go to do not actually decide the rates themselves. Pawn shop interest rates are now regulated by Federal Laws which is why different states might have different rates. The rates can go anywhere from 5% to 20%. Obviously, the pawnshops will charge you the maximum interest rate as they need to make a profit to stay in the business, but that doesn\’t mean they are trying to rip you off as their main motto is to do business and sustainable relations with customers so that people come back to the shop again.

If you are concerned about the pawn shop loan interest rates, it is advisable that you check the state law for the interest rates before going to the pawn shop.

Key takeaways

In a country like the US where a significant chunk of the population struggles with personal finances, pawnshop loans are a good alternative for personal loans. The extra money that people can make by pawning used merchandise can help them in emergency situations without hurting their credit scores. The quickness and uncomplicated nature of these pawn loans make them one of the best ways for dignified sustenance.



25,870 thoughts on “How do Pawn Shop Loans Work”

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