Payday lenders, title lenders and pawnshops all market themselves to borrowers who lack other options — but of the three, pawnshops are the least toxic.
Interest rates on pawnshop loans vary and typically are presented as fees, but it’s more useful to compare loans in terms of annual percentage rate. Pawn loans can run to more than 200% APR. That’s far more than traditional lenders charge — but better than payday loans and car title loans, which easily can top 400% APR or more. Plus, there’s no risk of damage to your credit or being pursued by debt collectors or in court.
“Pawnshops used to be considered a lender of last resort, but that was before the advent of payday loans and auto title loans,” says NerdWallet columnist Liz Weston. “These days pawnshops can look pretty good by comparison. The interest rates are high compared to the alternatives available for people with good credit, but you don’t risk being trapped in an endless cycle of debt as you do with payday loans, or even worse, losing your car, which is a frequent outcome of auto title loans.”
To be clear, we are not recommending pawnshops. But if you have no other options and need cash immediately, a pawnshop is better than an auto title loan or payday loan.
How pawnshop loans work
To get a pawn loan, you go to a pawnshop with something you own that you’re willing to leave there as collateral. The staff assesses the item’s value, condition and resale potential, then decides whether to offer a loan.
The shop will look at resale values, not what the item cost to purchase new, and also has to consider its overhead. Nolo.com estimates pawn loans run about 25% to 60% of resale value. It can pay to shop around and compare offers from several pawnshops; offers can vary up to 258% for the same item, according to an analysis by PawnGuru, an online marketplace.
If you accept a loan, you walk away with the cash and a pawn ticket, which you’ll need to get your item back. We suggest taking a photo of the ticket and emailing it to yourself as backup.
Because you have left collateral with the lender, a pawn loan doesn’t require a credit check, bank account or co-signer. But you must be 18 or older and show proof of your identity. And pawnshops are in regular contact with law enforcement to avoid dealing in stolen goods, so the shop may require proof of purchase or ownership of the item.
Items you can pawn vary by store and location. Among those likely to do well are:
- Musical instruments.
- Current electronics.
- Name-brand digital camera equipment.
If all goes according to plan, you return to pick up the item within the agreed-upon time, usually 30 days to a few months, and pay off the loan plus fees and interest. Limits on interest, fees and loan amounts vary by state and sometimes by municipality. Fees can include application and appraisal fees, plus insurance and storage charges.
If you can’t repay, you may be able to extend or renew the loan (depending on the laws in your area). If you don’t eventually repay the loan, the pawnshop sells your item to get its money back. The amount of time before the shop can sell an item varies by jurisdiction.
The average loan is for about $150, according to the National Pawnbrokers Association. But pawning has gone online in recent years, sometimes attracting upscale customers. Pawngo will lend up to $1 million and Borro will lend up to $2 million to customers who have the right assets to use as collateral.
Pawnshop loans can appeal to consumers who can’t qualify for a conventional loan. They may cost less than the penalty for being late with a credit card payment or a reconnect fee for utilities.
They cost more than a traditional loan, but you also get the money faster and without the need for a credit check.
There’s no legal requirement to repay, so your credit scores don’t suffer if you don’t pay off the loan. You won’t be harassed by debt collectors or sued if you don’t repay.
There’s a real risk you won’t be able to pay back the loan and retrieve your item. You might not mind that if it’s your old clarinet that you planned to give to your kid (who may not want to play clarinet anyway). You might mind a lot if you pawned a family heirloom necklace from your grandmother.
About 80% of pawn loans are repaid, according to the National Pawnbrokers Association. But repeat customers are common. If you find yourself reborrowing or extending a pawn loan, or pawning and redeeming the same item repeatedly, you need more than this short-term financial patch.
But the biggest downside is the cost. An APR of 36% is generally accepted by personal finance experts and regulators as the upper end of affordability. A pawnshop loan of $100 costing $15 in fees and due in 30 days runs about 182% APR.
Alternatives to pawning
If you need cash today — the electricity is about to be cut off or rent is due — consider:
Payroll advance: Will your employer advance money from your next paycheck? Can you use an online service such as Earnin, which pays hourly workers the same day they work?
Bill forbearance: Can you contact your utility or other creditor for another day or two of grace?
Community assistance and payday alternatives: Can you get a loan or assistance from a local agency to help with rent, utilities or emergency need? Will your place of worship offer small loans or help? Check NerdWallet’s community assistance database with resources available to residents in nearly two dozen states.
If you have a little more time, consider:
Selling: If you’re willing to part with the item you’re pawning, consider selling it to a pawnshop or private buyer. A private buyer will likely pay more but take longer. Pawnshops usually offer less because they have to cover overhead — but you’ll get the money more quickly. Either way, a sale will likely net more than a pawn loan.
Existing banking relationship: See whether it’s possible to get a small-dollar loan from your bank or credit union, because those have much lower APRs than a pawn loan.
Personal loans: You could consider an online personal loan, but be aware they generally start at about $2,000 and tend to require credit scores of at least 580 or higher. Online alternatives that lend lower amounts include OppLoans and Rise.
Prep for the next cash crunch
Once this short-term cash shortfall is resolved, start planning ahead for the next time.
Research has shown that even a small emergency fund — as little as $250 — can protect families from eviction, missed payments and needing to enroll in public benefits. To get started, explore ways to find some extra cash or savings.
Bev O’Shea is a staff writer at NerdWallet, a personal finance website. Email: firstname.lastname@example.org. Twitter: @BeverlyOShea.