November 21, 2024

How Do Pawn Shop Loans Work — and Are They a Good Idea?

What comes to mind when you think of a pawn shop? A rundown storefront sandwiched between a check-cashing outlet and a mini-mart? A dusty display case filled with jewelry and firearms?

While these are familiar stereotypes about this type of business, many modern pawn shops are reputable places to buy and sell all sorts of items. And for many communities, they’re the most accessible source for short-term loans.

So how do pawn shop loans work, exactly — and more importantly, is this funding option a good idea when you need cash fast?

How does pawning work?

If you’re new to pawning, you might think of these businesses as a place where people buy and sell secondhand goods. That’s a big part of what a pawn shop is, but you can also turn to your local pawnbroker when you need money and don’t want to permanently part with valuables by selling them for quick cash.

Here’s how it works: Many types of loans use collateral — a valuable item like a house or car that the borrower pledges as security for the loan. If the debt fails to be repaid, the lender can take possession of whatever the borrower put up as collateral.

Traditional collateral loans like auto financing and mortgages require a credit check to determine a borrower’s ability to repay the loan. But pawn shops operate differently. Instead of using a credit check to decide the terms of the deal, the pawnbroker bases the loan amount on the value of the item you bring in.

The process will go something like this:

1. Appraisal. The pawnbroker examines your jewelry, electronics, or other valuables, considering their current market value, condition, and how easy they’ll be to resell.

2. Offer. Based on this assessment, the pawnbroker makes you an offer — typically a percentage of the item's estimated resale value.

3. Acceptance. You sign a pawn agreement (a contract) outlining the pawn loan terms — the amount, interest rate, fees, and the loan term (aka the deadline for repayment).

4. Funding. With a contract in hand, you leave your valuables with the pawnbroker in exchange for cash.

5. Repayment. To get your item back, you must repay the loan plus interest and fees within the agreed-upon timeframe.

6. Default. If you fail to repay the loan, the pawnbroker gains ownership of your item and can sell it to recoup their costs.

Is the pawn industry regulated?

Pawn shops are regulated at both the state and federal levels. While laws vary from state to state, they generally cover areas like licensing, interest rates, record-keeping, and consumer protection. Federal laws like the Truth in Lending Act also apply to pawn shop loans.

The National Pawnbrokers Association (NPA) offers resources like model pawn contracts and guidelines to help pawnbrokers comply with applicable laws. But it’s up to each individual pawn shop to make sure their contracts are above board — and as a borrower, it’s your job to carefully read the terms of the pawn loan before you sign.

Pawn versus sell: What’s the difference?

Pawn shops don’t just handle loans — they also function as buyers and sellers of secondhand goods. You might go this route if you have something of value that you don’t mind saying goodbye to forever. And if you head to your local pawn shop hoping for a loan but the broker says your goods aren’t valuable enough to serve as collateral, they might offer to sell them instead.

The pros of pawn shop loans

If you have things to pawn, this type of collateral loan offers several advantages, especially when you need quick cash and have limited borrowing options. Here’s a look at the benefits.

No credit check. Pawn shops don't typically require a credit check, so you can get a pawn loan even if you have poor credit or no credit history at all.
No impact on your credit score. Since pawnbrokers don't report loan activity to credit bureaus, the loan won't affect your credit score, even if you default.
Fast and convenient. You don’t have to go through a lengthy application process like you would with a personal loan, so you’ll usually walk out with the cash within minutes.
No legal obligation to repay. The only consequence of not repaying your pawn shop loan is losing the item you put up as collateral. If you default on the loan, you won’t face debt collectors or legal action.

The cons of pawn shop loans

Sure, pawn shop loans can be helpful in a pinch. But it's important to understand the drawbacks before you pull the trigger.

High interest rates. Pawn shop loans often come with high interest rates and fees, which can make them an expensive way to borrow money.
Risk of losing your item. If you’re determined to get your valuables back, offering them as collateral is risky.
Low loan amounts. The value of your item determines the amount you can borrow, and the pawn shop typically only lends you a fraction of its actual worth.
Short repayment terms. Pawn shop loans usually have short repayment terms, often just a few months, which can make it difficult to repay the loan if you're in a tight spot financially.

Alternatives to pawn shop loans

Pawning a musical instrument that once went on tour with the Beatles might seem smart if you need fast cash. But if you default and the pawnbroker sells the instrument, that’s it — George’s guitar is gone for good.

There are two alternatives we won’t recommend: payday loans and title loans. The first are known for extremely high interest rates and can easily trap you in a cycle of debt. The second uses your vehicle as collateral, much like a pawn shop loan, but usually with heftier interest charges and the possibility of losing your car.

Consider these options instead:

Sell your item outright

If you're willing to part with your item permanently, selling it online can give you more cash than a pawn loan. Consider online marketplaces like eBay, Facebook Marketplace, or Craigslist. You might also find luck taking specialized items to a consignment shop.

Borrow from friends or family

If you have a good relationship with someone who can lend you money, a friends-and-family loan can be a more affordable option, often with more flexible repayment terms and lower or no interest.

Take out a personal loan or cash advance

While personal loans require a credit check, many online lenders still offer them to people with fair or poor credit. You may also find that a personal loan offers a higher borrowing amount and a longer repayment term than a pawn shop loan. And some lenders offer cash advances — small, short-term loans that can help you cover an unexpected expense.

Use an Earned Wage Access app

Apps like EarnIn allow you to access a portion of the wages you’ve already earned before payday — and in the case of EarnIn, there are no mandatory fees at all. These apps are a good way to cover small, short-term expenses without putting your grandma’s jewelry up as collateral.

Get the cash you need today with EarnIn

EarnIn’s Cash Out tool lets you access your pay as you work — up to $150/day and up to $750/pay period — so you can get the money you need without the hassle or high fees of a pawn shop loan. There’s no credit check, no interest, and no mandatory fees. And with a Lightning Speed transfer, the money can be in your account within minutes instead of days.

Download EarnIn to make every day payday.

1. Subject to your available earnings, Daily Max and Pay Period Max. EarnIn does not charge interest on Cash Outs. EarnIn does not charge hidden fees for use of its services. Restrictions and/or third party fees may apply. For more info visit earnIn.com/TOS.

2. Fees and restrictions apply to use Lightning Speed. Lightning Speed may not be available at all times. See EarnIn Cash Out User Agreement. Expedited Transfer fee paid up front where applicable - see Evolve Deposit Account Agreement.