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If you need cash fast and don’t have the credit to get a voucher Personal loan, you may be thinking of alternative loan products. These are things like payday loans, auto title loans, and pawn shops.
None of these products are particularly good and they are best used as a last resort. But if you had to choose one, pawn shops are the least financially damaging because they cannot affect your credit. They are not fail-safe, however, and they have their limitations.
What is a pawnshop?
A pawnshop is a type of secured loan, which means that it is backed by guarantees. In this case, it’s the pawn, the item you bring in and walk away with the pawnshop. If you pay off the loan on time, you will get your pawn back. But if you don’t, the pawnshop keeps the pawn and puts it up for sale in their store as payment for the loan.
As long as you have something of value, pawn shops have no other qualification requirements. It is their strength; Unlike other loans, which rely on checking your income and credit, you could walk into a pawnshop with no income or credit and still get a loan.
In fact, pawn shops are one of the oldest forms of loan for this reason. After all, our ancestors didn’t have FICO scores or pay stubs to prove their creditworthiness to lenders, so they used a collateral-based system like this one.
How do pawn shops work?
First, you will find a valuable item and take it to the pawnshop. Keep in mind that this must be something with a high resale value that can be easily sold to the general public. Your book collection might have cost you dearly, but the pawnshop is unlikely to be able to get a lot of it, for example. Popular pawn items include jewelry, power tools, firearms, musical instruments and electronics.
The pawnshop will ask questions about your pawn to assess its value and make sure you actually own it (thieves frequently use pawn shops to turn stolen items into cash). Then they’ll ask you if you want to sell it or pawn it.
If you pledge it, they will offer you a loan based on its value. You can usually expect a loan of 25% to 60% of its resale value (important: the resale value is usually much less than what you paid for the item when it was new!). In addition, pawn shops charge a financing fee. instead of an annual percentage (APR), and they can be quite expensive. Regulations vary widely from state to state, but when you do the math, you could pay the equivalent of 13% to 1300% APR. In comparison, the average personal loan charges a rate of around 9.65% APR.
Say, for example, your pawn has a resale value of $ 1,000. The pawnshop offers you a loan of 25% of its resale value ($ 250) with a finance charge of 25%. Not only will you owe $ 250 in capital, but you will also owe $ 62.50 in finance costs. This means that you will owe a total of $ 312.50 on a loan of $ 250.
All things considered, if you accept your loan, you will get the money immediately and the pawnshop will give you a pledge receipt, a receipt for what you have pledged. Make sure you don’t lose it as you will need it to collect your item later.
The pawnshop will tell you when you need to return to pay off the loan and collect your item, usually within 30 or 60 days. If you don’t return by that date, the pawnshop will simply keep your item and list it for sale in the store. There is no penalty for non-payment by the due date, since your collateral is then used to pay off the loan for you.
When are pawn shops a smart move?
If you need the money, it’s almost always best to apply for a loan from more traditional sources. That way, you’ll save money, build up credit, and potentially access more cash if you need it. But there are a few cases where a pawnshop can really help you, such as when:
- You need the money immediately. Some personal lenders offer same day financing. But if you need the cash almost instantly, you can go into a pawnshop and get the cash within minutes.
- You only need a small amount of money. Pawn shops usually only accept small items and offer loans for a fraction of their value. So the maximum you could get is a few hundred dollars.
- You have a valuable item that you are willing to potentially lose. If you are not able to repay the loan on the due date, you could lose your item for good. This is how some people end up losing important heirlooms.
Advantages and disadvantages of pawn shops
If you are 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 disadvantages of pawn shops? If so, you might be okay with getting a pawnshop.
Benefits of pawn shops
- Quick financing: You can get out of the pawnshop with the money in a matter of minutes.
- Does not affect your credit: You do not need good credit (or any credit, for that matter) to get a loan. And if you don’t pay, your credit score won’t be affected either.
- No hassle for creditors if you don’t pay: You will not be referred to collections or harassed by creditors if you do not pay the loan. In this case, the pawnshop simply claims ownership of your pawn and sells it to collect the money.
Disadvantages of pawn shops
- Potentially expensive: Considering the financing costs that come with pawn shops, they can be considerably more expensive than a traditional personal loan. Take this into account when deciding if this is the right financing option for you.
- The loans are very small: The average pawnshop is $ 150 and lasts for 30 days, depending on the National Association of Pawnbrokers. To find out how much you could get for your loan, figure out the resale value of your item, then multiply that by 0.25 and 0.60 – this is the range you might expect to get.
- You can lose your pawn: If you lose your pawn ticket, you will not be able to get your pawn back. If you don’t pay the loan back on the due date, you could lose your pawn as well. This is how many people lose their grandmother’s wedding ring, for example.
- Does not create credit: Since pawn shops are not reported to the credit bureaus, they won’t help you either. build credit. Without credit, you’ll have a harder time renting or buying a home, qualifying for better loans and credit cards, or even finding a job in some cases.
Alternatives to pawn shops
If you are in a hurry and are unable to apply for a more traditional loan, pawn shops are not your only option. You can consider:
- Request an extension. It may sting to ask, but if you have bills to pay, companies are often willing to work with you if you run into a temporary financial problem.
- Find help from a charity. 211.org is a great resource for finding local charities that can offer temporary help, especially for the underprivileged. The money is for you; make sure you take advantage of it if it’s there.
- Sell something. Pawn shops 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.
- Register for a secondary activity. A lot jostling side lets you sign up and start earning money right away, like Uber (and Uber Eats), Rover, TaskRabbit, transcription, and mystery shopping.
- Find an alternative payday loan (PAL). Some credit unions offer these small loans to their members. These loans help build credit and don’t charge exorbitant fees, and hence they can be a great option.
- Save an emergency fund. It won’t help you if you need help today, but now is a great time to think about starting a emergency fund if you can afford it. That way, the next time you land in a bad patch, you’ll have a cushion to catch up with.