Are Pawn Shop Loans A Good Lending Option?

Getting approved for a loan can take some time, which is why some people in need of quick cash look for same-day loans that can provide faster funding. Among these options are pawn shop loans, which can offer immediate funding without a credit check, though they come with high fees and other financial risks.

Let’s take a look at how a pawn shop loan works and why you might want to consider an alternative lending option.

A pawn shop loan, or pawnbroker loan, is a type of short-term secured loan available at traditional or online pawn shops. Your collateral, or “pawn,” can be almost any item of value. After assessing the item’s value, condition and potential for resale, the pawnbroker may offer you a loan amount they deem appropriate.

This lending agreement comes with a caveat though. If you, the borrower, can’t repay the loan amount within the agreed time period, the pawn shop can keep your item and resell it in the store.

Along with causing you to risk losing a valuable item forever, pawn shop loans don’t come cheap. Additional fees and charges can add up and leave you in a worse financial situation than you started out in.

Pawn shop loans typically don’t require hard inquiries or other types of credit checks. These loans only require that you’re over the age of 18, can show proof of identity and can bring in an item to pawn off – preferably one the broker could resell for high value. Common pawns are jewelry, electronics, firearms and musical instruments.

The loan amount that a pawnbroker offers will be based on the item’s assessed resale value, often much lower than its original purchase price. If the item is approved, a lender will typically offer 25% – 60% of the resale value.

So if you bring in an item worth $2,000 in resale value and a pawnbroker offers you a loan worth 25% of that, your loan amount will be $500.

Here’s where the additional costs come in: The average annual percentage rate (APR), or “financing fee,” for a pawn shop loan is around 200%. Rates and terms vary between pawn shops, but a monthly interest rate can be as high as 20% – 25%.

Let’s go back to our $500 loan example. If your lender charges you 25% interest, that’s an additional $125 you’ll owe on the loan, for a total of $625. Most pawn shop loan terms are 30 – 60 days, and if you can’t repay the loan (plus interest) by the agreed-upon date, your collateral may be as good as gone. Some pawnbrokers may allow for a rollover, but that could cost you another financing fee.

Pawn shop loans aren’t entirely bad lending options, but consider both their benefits and drawbacks before making your decision.

Pros

• Fast funding: Pawn shop loans can give borrowers their money the day they enter the pawn shop.
• No credit requirements: Borrowers with low credit scores can qualify for a pawn shop loan based solely on the item they bring in.
• No credit consequences: You’re not legally required to repay a pawn shop loan. Therefore, your credit score won’t suffer if you don’t pay it back. Also, creditors and debt collectors won’t harass you for the amount.

Cons

• Expensive fees: Pawn shop loans typically charge around 200% APR, with 20% – 25% monthly interest rates.
• Low loan amounts: Pawn loans are only a percentage of an item’s resale value, which is typically much lower than its original value. The average pawn loan is about $150, according to the National Pawnbrokers Association (NPA).
• Possibly losing your item for good: Failing to repay a pawn loan can result in you losing your valuable item and the pawnbroker reselling it in the store.
• No credit benefits: Pawn shop loans won’t hurt your credit, but they won’t help build it. Pawn shop lenders don’t report to any of the credit bureaus, so the lending agreement is solely between the borrower and the lender.

The federal government regulates pawn shops, but some pawnbrokers may operate illegally and charge higher than a state’s allowed APR and commit other acts of predatory lending. The Consumer Financial Protection Bureau (CFPB) has filed numerous lawsuits against certain pawn shops for illegal practices.

Payday loans are similarly predatory for their high rates and fees. If safer financing is available to you, it’s probably best to consider alternative options before turning to pawn shops or payday lenders.

Here’s our list of alternatives that are generally safer than pawn shop loans.

Personal Loans

A personal loan is a lump-sum financing option repayable in monthly installments. Rates, terms and loan amounts can vary by lender and lending platform, but Rocket Loans℠ can offer loans of $2,000 to $45,000 to approved borrowers.

Applying for a personal loan requires a credit check and a credit score of at least 650 for good rates and terms, since this kind of loan is typically unsecured (that is, it doesn't require collateral). If approved, you should receive your funds within 1 – 7 business days and be able to start making monthly payments.

Certain borrowers may qualify for same-day funding through Rocket Loans, so it’s possible you could receive your money the day you’re approved.¹

0% APR Credit Cards

Some credit card companies offer 0% APR introductory periods when you sign up for a new card. This means that for a period of 12 – 18 months, you won’t have to pay interest on what you owe on that card.

If you can repay the amount you borrow within that time frame, you can avoid interest altogether. If not, credit card interest rates average around 16%, and you’ll be at the mercy of those rates if you go past the introductory period.

Peer-To-Peer Lending

Peer-to-peer lending is a financing system that lets people or companies borrow from and lend to each other. Borrowers with lower credit scores may qualify for loans they otherwise couldn’t qualify for – possibly with lower rates. Lenders even stand to earn a direct return when they invest in a borrower.

Emergency Funds

If you’ve built an emergency fund, consider drawing directly from that if you believe your situation calls for it. There’s no credit check, no rates and no repayment period when you pull from your personal savings. If you take too much money out though, you may not have enough for future emergencies, so keep that in mind when considering your options.

What do I need for a pawn loan?

As stated above, you only need to be 18 or older and have your personal identification (for example, a driver’s license) and an item to pawn. Pawnbrokers will often only accept items they could easily resell in their store, so consider that when choosing what to pawn.

Do pawn shops do title loans?

Pawn shops typically don’t offer title loans because a car’s title isn’t something the store could sell if you can’t repay your loan. Similar to pawn shop loans, title loans require an item as collateral. With title loans, that item is your vehicle’s title, which serves as collateral to secure the loan. Title loan companies will ultimately seize your vehicle if you can’t pay back what you borrowed, plus interest.

What’s the most a pawn shop will loan?

Pawnbrokers typically lend 25% – 60% of your item’s resale value, so your loan amount will vary based on an item’s assessed value. The average amount for a pawn shop loan is typically $150.

Pawn shop loans can be an option if you’re confident you can repay the loan in time, but it’s important to keep those high rates and fees in mind, as well as the risk of losing the item you’re pawning. It can be a lot to risk for a short-term loan, especially if you could find funding elsewhere. Review all your options before making a decision, and consider your safer alternatives.

Curious about a personal loan? Get the process started with Rocket Loans^SM and see the rates you qualify for.

¹Same day funding is available for clients completing the loan process and signing the Promissory Note by 1:00 p.m. ET on a business day. Also note, the ACH credit will be submitted to your bank the same business day. This may result in same day funding, but results may vary, and your bank may have rules that limit our ability to credit your account. We are not responsible for delays that may occur due to an incorrect routing number, an incorrect account number or errors of your financial institution.