A pawn loan can provide fast access to cash. But before agreeing to exchange a valuable item you own for money, it’s crucial to be aware of how the pawn loan process works – and what happens if you are unable to pay back the loan within the agreed-upon period.
How do pawn loans work?
A pawn loan is a type of short-term secured personal loan. An item of value is held as collateral by the lender, known as a pawnbroker, until the borrower repays the loan in full, including interest.
The pawnbroker will appraise the item you wish to pawn based on its condition, age and current market value. The broker will keep the item and will then extend a loan to the borrower for a portion of that market value.
Pawn loans have short terms, usually 30-days. You must repay the loan in full by the end of that term, plus fees and interest, in order to reclaim the item.
Pawn loan interest rates
Interest on pawn loans is usually between 5% and 30%, split between a storage fee and an interest rate. Borrowers may also have the option to extend their loan for 30 additional days, but this also leads to higher interest costs.
If the borrower doesn’t pay back the amount borrowed or return to collect their item, it becomes the property of the lender.
What you can pawn
Typically, items used as collateral for a pawn loan include:
- Electronics (such as laptops, tables or gaming consoles).
- Antique furniture.
- Collectibles (such as coins or sports memorabilia).
How much money can you get with a pawn loan?
Pawnbrokers will typically lend between 20 to 60% of the appraised value of an item. You may pay interest and fees on top of the loan principal.
Let’s say, a pawnbroker values your laptop at $400. You might receive a pawn loan of $120 (30% of the value of the item) for 30 days. If the broker charges an additional 5% interest rate and 25% storage fee, you’ll need to repay $156 at the end of the month to reclaim the laptop.
Nerd tip: According to the Canadian Pawn Association, a professional trade organization for the pawnbroking industry, the average amount Canadians borrow via a 30-day pawn loan is $150.
Pros and cons of pawn loans
For some borrowers in need of a small amount of cash for the short term, a pawn loan may provide a temporary solution. But these loans also come with several downsides that are important to note:
- Fast approval: Pawn loans can be approved quickly so long as you can provide government identification, so they may be a viable option for certain borrowers looking for quick cash.
- No credit checks: Pawn brokers don’t consider credit scores before lending to prospective borrowers, as pawn loans are already secured by collateral. Non-repayment of the pawn loan will also not affect your credit score, but you may lose the item you pawned.
- Lower risk than other high-interest loans: Pawn loans are a high-cost form of credit, but in most cases the consequences of not paying back the loan are also not as significant as car title loans or cash advances. If you fail to repay a pawn loan within the agreed-upon terms, you will lose your collateral, but you are unlikely to face additional interest payments or legal consequences.
- High interest rates and fees: Pawn loans charge much higher interest rates than many other types of traditional loans or credit cards. There may also be additional storage fees.
- Risk of losing the asset: If you fail to repay the pawn loan by the agreed-upon date, you’ll likely lose ownership of the item put up as collateral and the shop can resell it at a higher value.
Pawn loan alternatives
With the high price the lender will charge you to retrieve your collateral and the risk of losing the item if you fail to pay, it is worth considering other options before agreeing to a pawn loan, including:
Personal loan or line of credit: An unsecured personal loan or line of credit provided by a bank or credit union is one way to access emergency funds at a lower interest rate than a pawn loan, and doesn’t require collateral. You may need to meet minimum credit score requirements, however.
Higher credit card limit or cash advance: For Canadians with a credit card, requesting a higher limit from your provider may provide a temporary solution to cash flow concerns.
Cash advance. Taking out a cash advance from your credit card to cover an emergency expense will come with a fee and an APR that is higher than your credit card APR, but it will likely be lower than the annual interest you’ll pay for a pawn loan.
Overdraft protection: For emergency cash flow needs, you may be able to add overdraft protection to your chequing account with your financial institution, which will allow you to carry a negative balance for a short period of time without penalty.
Frequently asked questions about pawn loans
No. Pawnbrokers offer loans using physical items as collateral. Payday loans use your future expected income as collateral.
Pawn loan interest rates depend on factors like the amount borrowed and provincial regulations. Rates differ by lender but are generally made up of an interest rate and a storage fee.
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