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Pawnshop loans allow you to put up an item of value—jewelry, antiques or artwork, for example—in exchange for a sum of money. They may appeal to people who can't qualify for conventional loans or who live somewhere that's underserved by traditional financial institutions. For some folks, pawnshop loans are a quick, convenient way to borrow money.
However, pawnshop loans may lose their appeal when you realize that they come with high fees and won't help you build credit. Here's what to know about pawnshop loans, whether it's a good option and alternatives to consider.
What Is a Pawnshop Loan?
A pawnshop loan is a type of collateral loan in which you provide an item of value to a pawnbroker in exchange for a small lump sum of money. The average pawnshop loan amount is $180, according to the National Pawnbrokers Association; loan amounts are based on the potential resale value of the item. You typically have 30 to 90 days to repay the money, but the timeline depends on laws in your state.
Borrowers often use jewelry, watches, electronics, furniture, antiques and other high-value items as collateral. The pawnshop can keep your collateral and resell it if you don't repay the loan.
How Do Pawnshop Loans Work?
The amount you may receive with a pawnshop loan is based on the value of the collateral you provide instead of your credit history or proof of income. When you bring an item to a pawnshop, the pawnbroker assesses its condition and resale potential. They'll typically offer an amount that ranges from 25% to 60% of the item's resale value.
Interest rates may range from as little as 12% to 240% or more, depending on how your state restricts pawnshop loans. You may also pay fees to cover storage and insurance on the pawned item.
If your interest rate is charged as a fee, it may equate to a high annual percentage rate, or APR. A $200 pawnshop loan for 30 days with a $25 fee is equivalent to an APR of about 152%, for example. Meanwhile, APRs for personal loans commonly range from 6% to 36%, and credit cards average 21%.
If you accept the loan, the pawnbroker hands you a pawn ticket that includes details like the amount borrowed, fees and repayment term. You'll need the ticket when you're ready to pay the loan in full, which should be on or before the due date. The pawnbroker will then give back your collateral.
Be aware: If you can't repay the loan within the payment period, you might be able to extend the loan—but with more interest and fees attached. If you can't pay off the loan at all, you'll have to surrender the collateral.
About 85% of borrowers pay off their loans and collect their collateral, according to the National Pawnbrokers Association. If the collateral goes unclaimed, it becomes the property of the pawnshop. The shop then sells the item, normally at a deep discount compared with the item's retail value.
Pawnshop Loan Requirements
Pawnshop loans generally come with fewer requirements compared to other financing options. To qualify for a pawnshop loan, you must:
- Be at least 18 years old
- Show some form of identification
- Provide proof you own the item used as collateral
Unlike personal loans and credit cards, pawnshop loans don't require you to provide financial information, show proof of employment or consent to a credit check.
Pros and Cons of Pawnshop Loans
Before you decide to pursue a pawnshop loan, carefully consider all the positives and negatives of going this route for quick cash.
Pros
It's an easy way to borrow money. There's no lengthy application or credit check involved. You bring in an item of value, and the pawnbroker offers a loan based on its worth—often within minutes.
The loan doesn't have to be repaid. If you decide not to repay the loan, you can walk away without owing anything more. The pawnshop simply keeps and sells the item you used as collateral.
Your credit isn't impacted. Because pawnshop loans aren't reported to credit bureaus, taking one out—or choosing not to repay it—won't affect your credit scores.
Cons
You won't build credit. Unlike installment loans and credit cards, pawnshop loans aren't reported to the credit bureaus. That means repaying one won't do anything to improve your credit.
Borrowing amounts are low, and fees can be high. The average pawnshop loan is for $180, which is much less than what you could borrow with a personal loan or credit card. As a percentage of the amount borrowed, fees can translate to high APRs.
You may lose your collateral. Borrowers often pawn jewelry, musical instruments or family heirlooms, which may have sentimental value. You won't get your meaningful item back if you fail to repay the loan.
Learn more: Which Loan Is Best for Building Credit?
Is a Pawnshop Loan Right for Me?
A pawnshop loan is an easy way to borrow money without a credit check. It doesn't even have to be repaid if you're OK with forfeiting your collateral. This type of loan could be right if you:
- Have a valuable item to use as collateral
- Need to borrow a small amount
- Don't want your credit pulled
- Lack the qualifications for a loan or credit card
- Have a plan to repay the loan
- Don't mind parting with your collateral if necessary
Alternatives to Taking Out a Pawnshop Loan
Given that pawnshop loans come with several downsides, you might want to look at other options. Here are some pawnshop loan alternatives to consider.
Sell Your Valuables
In addition to providing short-term collateral loans, pawnshops also buy items with the intention of selling them and making a profit. However, you might not get as much money for your property from a pawnshop as you would from a private buyer. You can find a buyer and sell valuables yourself through several online platforms.
Use a Credit Card
If you need to cover expenses quickly, you might turn to a credit card. The APR for a purchase or cash advance likely will be well below the APR for a pawnshop loan. On top of that, a positive history of making payments on the card can help lift your credit score. Just be sure you can pay off the amount quickly to avoid accumulating interest.
Take Out a Personal Loan
Personal loans usually come with reasonable APRs, help build credit and don't require collateral. For these reasons, personal loans are typically a better option than a pawnshop loan. But you'll need to qualify for a personal loan based on factors like your credit history and income. You can see what rates you might qualify for using Experian's loan comparison marketplace.
Trim Expenses
It might be hard to do when you're already struggling, but finding ways to cut costs may help you avoid expensive loans. For instance, you may decide to cancel streaming subscriptions or eat all of your meals at home.
Make Money Through a Side Gig
Even temporarily, you might consider taking on a side gig to bring in extra money. You may, for instance, try online tutoring, drive for a ridesharing or food delivery service, or do part-time freelance work. That little bit of extra money could get you over your financial hump.
Ask About Payment Plans
If you're behind on credit card or loan payments, reach out to your creditors and ask whether they'll agree to a payment plan. This type of plan can lower your monthly payments over a certain period of time, giving you some financial breathing room.
Learn more: How to Get Emergency Money
The Bottom Line
A pawnshop loan may seem like an ideal way to quickly address a financial need. However, this solution may come at a hefty price, including high fees and the potential loss of a valuable item.
Before you head to a pawnshop, consider using cheaper alternatives like a credit card or a personal loan. Checking your credit report and FICO® Score☉ Θ to see where you stand can also help you better understand your options.