LOS ANGELES, Jan. 26, 2021 /PRNewswire/ -- Every day, plenty of people find themselves in need of some quick cash. Personal loans may be fast, but even they can take a day or two to fund. Not to mention that borrowers must apply and hope they pass the credit check.
Often, people that need money right away turn to pawn shops for faster cash.
What are Pawn Shops?
Although many people have heard of pawn shops and perhaps even used them, they may be asking themselves, "how do pawn shops work?"
Pawn shops are businesses that buy and sell virtually any items of value. Common pawn shop inventory includes jewelry, precious metals, musical instruments, firearms, and video game consoles.
Sellers can come in and negotiate prices on their items before selling to pawn shops — and buyers can do the same when buying items.
When people who don't want to give up their item to a pawn shop in the form of a sale but still need fast cash, they can get a pawn loan.
How Do Pawn Loans Work?
Pawn shops will let borrowers use an item of value as collateral in exchange for a loan. In fact, pawn brokers prefer giving out loans instead of buying items because the profit potential is larger.
Here's how it works:
The pawnbroker evaluates the item, offers the borrower a loan amount, then hands the borrower the money and a pawn ticket (the receipt). The pawnbroker then takes possession of the item. There are no applications or credit checks.
The borrower must then pay back the loan plus interest by the due date — usually 30 or 60 days following the date on which the borrower received the loan.
When the borrower pays back the loan, they receive their item back.
What Happens If a Borrower Can't Pay Back a Pawn Loan?
If the borrower fails to pay back the loan, the pawn shop takes legal ownership of the item. The borrower doesn't suffer any credit score damage, nor do they have to face collections.
Alternatively, the borrower can ask for an extension. If granted, they have to pay a portion of the interest on the original due date.
Pros of Pawn Shop Loans
Pawn loans offer several benefits.
- Fast cash: Borrowers can receive their money the same day they visit the pawn shop.
- No credit checks or applications: No hard inquiry means pawn loans don't damage score and serve as excellent options for borrowers with poor credit. No application means the borrower doesn't have to give out information.
- Low credit risk for borrower if borrower defaults: The borrower isn't in danger of credit damage, collections, or any other harmful effects if they default. They simply lose possession of their item.
- Extensions allowed: Borrowers can ask for extensions if they need more time to pay back the loan.
Cons of Pawn Shop Loans
Fast cash from a pawn shop does have its drawbacks.
- Expensive: Fast cash with little requirements often means a high interest rate. In addition, this can be compounded by the fact that borrowers often don't receive the best value for their item.
- Collateral required: Borrowers can't get a pawn loan without a valuable item as collateral. If you do not repay, the pawn shop takes legal ownership of your item(s).
- Easy to get trapped: Borrowers who have spending issues can get trapped deferring their debt through extensions.
- Can lose pawn ticket: If the borrower loses their pawn ticket, they may lose their item — even if they can pay the loan back.
Alternatives to Pawn Shop Loans
If the cons of a pawn shop loan seem to outweigh the pros, there are many alternative loan types even for people with a less than perfect credit history. Loan types that can meet similar needs to a pawn shop loan include:
- Cash advance loans: These are short-term loans that are designed to cover a small financial gap until payday, and then be quickly repaid. These loans are unsecured, which means they don't rely on a physical object as collateral, but they may require proof of income.
- Installment loans: For people who need a larger amount of cash, an installment loan can be a better option than a short-term pawn shop loan. Installment loans give large funds upfront and are repaid in smaller installments over time.
Notice: Information provided in this article is for informational purposes only. Consult your financial advisor about your financial circumstances.
SOURCE Advance America