The Main Disadvantages of Taking a Loan in the Pawn Shops

The Main Disadvantages of Taking a Loan in the Pawn Shops
Photo : Alexander Mils via Unsplash

Many consumers experience urgent money issues these days but not many of them can qualify for conventional loans. The local banks and credit unions are lending institutions that prefer to deal with reliable clients. 

If you are a low credit holder or have problems with your credit history chances are that your loan request will be rejected in these organizations. What are your solutions? You may think about getting a pawn shop loan. 

It may be more reasonable than opting for a payday loan or a pawn shop title loan which come with higher interests. Keep on reading to find out all the pros and cons of this decision.

What Is a Pawn Shop Loan?

There are about 10,000 pawn shops that operate around the USA. If you are an American citizen or resident living in Ohio, Massachusetts, or other states you may want to obtain this loan especially if you are located in an area that is underserved by conventional lending institutions. 

 Let's start with the definition of this lending solution. A pawn shop loan is often called a collateral loan as the borrower uses some valuable asset to back the loan up.

If you decide to turn to find the nearest Cash America pawn shop, you need to know that they will require collateral to lend you money. It may be your TV, jewelry, firearms, musical instrument, or any other valuable asset. The loan will be given based on appraised value of this item. 

How Is a Loan Obtained Through a Pawn Shop?

Are you looking for OppLoans in your state near you or other places to get a loan? If yes, chances are that you might decide to turn to the pawn shop. This is especially relevant for consumers who don't have a regular income source or stable employment and those who have a less-than-perfect credit rating. Some people can't afford to rest in a 5-star hotel while others need some cash to repair their car or just make ends meet until the next paycheck.

If you want to obtain a loan through a pawn shop you need to choose which valuable item you are willing to use as collateral. You may use your golden ring, a musical instrument, a TV set, etc. However, you need to be careful and understand that there is a chance of losing this asset in case of default or non-payment. 

Such a loan from a pawn shop is offered for a period of 30 to 60 days. If the borrower doesn't return the debt on time together with the interest and any applicable fees, collateral can be kept by the lender and resold to recoup the losses.

How to Get a Loan from a Pawn Shop?

What is the nearest pawn shop near me? The best way to find the most affordable deal is to shop around and ask for terms and rates at several pawn shops. The reason for that is that interest rates, APRs, and loan conditions vary by creditors who work at pawn shops. 

So, if you are planning to find the most affordable offer you need to take some time and do your research.

Once you decide which valuable item you are going to use as collateral, you may travel to the pawn shop and ask for a loan. The lenders will review and check your item to find out its condition and resale value. The pawn shop loan value won't exceed 60% of the resale potential of this asset. Getting several quotes at various pawn shops may help you choose the most suitable option.

Pros of Pawn Shops

According to the The National Pawnbrokers Association, the average amount of a pawnshop loan is $150. Generally, the borrower will be lent about 25% to 60% of the appraised value of his or her collateral.

There are several advantages of utilizing loans from pawn shops compared to title loans or payday lending solutions:

  • No credit checks. This is the only crediting option that really doesn't damage your credit score. While other loans claim to be credit check-free, they may still ruin the borrower's credit rating in case of a default. In this case, you don't risk damaging at or losing several points as you use collateral. You only risk losing it if you don't pay the debt off on time.

  • Cheaper Interest Rates. While title loans and payday loans may have APRs of up to 400%, a loan issued at the pawn shop will have an APR of about 200%. Of course, it isn't as cheap as a lending option obtained at the local bank. Still, it's a great short-term solution if you don't want to deal with credit inquiries or submit too many documents.

  • Fast Solution. There is no hassle or paperwork at all. You don't even need to provide proof of your regular income. This lending solution offers a really quick cash supply so that the borrower may receive the funds straight away and fund any urgent cash needs.

Cons of Pawn Shops

On the other hand, every lending solution comes with certain downsides. Here are the main disadvantages of getting this loan:

  • Risk of Losing Collateral. This is probably the biggest drawback of this lending solution. If the client can't repay the debt in full according to the repayment schedule, the asset used as collateral will remain with the lender. The pawn shop will resell this item to recoup its funds.

  • Getting into a debt cycle. This is a short-term solution but it still may lead you into a vicious debt cycle if you can't return the whole sum at the due date. Extending the repayment period may lead to higher fees and additional interest rates so it may become even more challenging to pay the debt off.

  • High Rates and Fees. Lenders who work at the pawn shops still place high fees and interest rates on these loans. Even though the borrower will pledge a valuable item as collateral, they will still have to pay the APRs between 15 and 240% and lenders usually charge the maximum.

  • Small Amount. The borrower will be lent about 25% to 60% of the appraised value of his or her collateral. So, you won't be able to obtain a large amount of cash here. This amount will depend on the value of the item you are going to pawn. Generally, clients receive a couple of hundred dollars.

Can You Get a Loan from a Pawn Shop?

You may obtain a small loan from a pawn shop in case you can't qualify for alternative lending solutions but still need additional funds for the short term. This loan can't cover any long-term financial needs as it's usually issued for up to 60 days. 

If the borrower accepts the loan terms, the money will be issued together with a pawn ticket. This ticket is very important so you need to make certain you won't lose it. Otherwise, you may take a photo of it and email it to yourself.

There are no strict demands and almost every person may obtain such a lending solution. The basic requirements include being over 18 years old, providing proof of identity, and having a valuable asset to use as collateral. 

Keep in mind that pawn shops and other lending institutions keep in touch with law enforcement in terms of dealing with stolen goods. Thus, you may be asked to provide proof of ownership or purchase of the item used as collateral.

Conclusion

To sum up, you need to value the pros and cons of getting a loan at the pawn shop. Consider alternative solutions that may be more affordable or unsecured.

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