What Is a Pawnshop Loan and How Does It Work?

What is a pawn shop loan?

A pawnshop loan provides a cash sum based on the value of the item you use to secure the loan. If you agree to the loan, the pawnshop holds your collateral until you pay the loan back. If you don't pay it back, the shop can keep your item.

The loan amount quoted factors in the item's resale potential minus the pawnbroker's marketing, insurance, storage, and profit margin — so it's typically much less than the item's appraised value or insurance value.

Customers can either take the pawnbroker's offer or leave it. For loyal, long-term customers, there may be a little room for negotiation. “You don't build your business by taking advantage of people,” says Johnny Whiteside, current president of the National Pawnbrokers Association and owner of Kendale Pawn Shop in Sanford, N.C.

How does a pawn shop loan work?

If you accept the offer, the pawnbroker draws up a contract or “ticket,” which lays out your loan terms, including the loan amount, interest rate, contract length, and due date for repayment. The pawnbroker holds your collateral until you return with the ticket to repay the loan. If you don't repay the loan, your collateral legally becomes the owner's.

Interest rates and fees

On your ticket, you'll find the interest rate and fees. But here, things can get confusing. This is partly because pawnshop loan rates are set per month — not per year like many other forms of borrowing, such as personal loans, mortgages, and credit cards.

It's also because rates are not generally expressed in terms of the annual percentage rate (APR). APRs account for interest rates on an annual basis, including upfront fees. As a result, they're a good way to compare actual borrowing costs on loans that charge both or don't express interest in terms of an annual rate — like pawnshop loans.

Interest rates

Pawnshops are subject to both federal laws (including The Patriot Act, Equal Credit Opportunity Act, and the Truth in Lending Act) and state regulations. Each state sets its own monthly interest rates. Here are five examples of monthly state interest rate caps:

• North Carolina: 2%
• California: 2.5%
• New York: 4%
• Virginia: 7%
• Illinois: 20%

Let's look at California to illustrate what a monthly interest rate equates to annually. Here's how:

• Multiply the monthly rate by 12 months: 2.5% x 12 = 30%

If another state's monthly interest rate were 5%, the yearly interest rate would be 60%. But if you don't pay the loan off within one month, the rate can be even higher. This is because the interest you owe is added to the loan balance, and new interest (for the next month) is calculated based on the higher balance amount.

Fees

In addition to interest, pawnshops charge handling or administrative fees (origination fees and/or fees for processing, collateral storage, insurance, etc.) to cover expenses and show a profit. When combined with the interest on the loan, the customer's total borrowing costs or APR could reach triple digits.

Loan terms

States can have different repayment terms. In North Carolina, for example, the loan term or period is 30 days plus a 60-day holding period for a total of 90 days (during which your pawned item can't be sold). In California, the minimum loan contract is four months.

Check repayment terms in your state to understand when the loan comes due in full, when you'll owe interest, and how long until your item can be sold if you can't pay.

Collateral

The item or items you wish to pawn, your collateral, should have a verifiable value and be verifiably yours. The days of pawnshop owners trying to pull one over on a customer or customers trying to outsmart the pawnbroker are pretty much over. Today, pawnshops record, report, and send a copy of each loan ticket to their local law enforcement department to prevent fraud and theft. Business is out of the shadows.

A pawnshop is the last place you would want to bring your stolen merchandise," says Armen Galstian, owner of Goodfellas Pawnshop in West Covina, Calif., which has been on the same street corner for 29 years.

Loan amount

Even if you know the object's provenance, don't expect to receive close to retail price. Like cars, once they leave the warehouse or showroom floor, they are no longer new in the eyes of the pawnshop. Pawnshop valuations can range from 20% to 80%. Gold, which can be melted down for scrap, typically draws the highest valuation. Electronics, which can go out of date in as few as three months, attract the lowest.

Documentation

If you accept the pawnbroker's quote, you'll have to show your driver's license or other form of government identification to start the paperwork and receive your cash. In exchange, you'll get a pawn ticket clearly stating your loan's terms, including when you should return to pick up your item or items.

What happens if I default on a pawnshop loan?

If you default on a pawnshop loan, there's typically no ding on your credit for non-payment. But the pawnshop takes possession of your collateral and can resell it to recoup its loss.

Put another way, pawnshop loans are non-recourse loans, meaning that if you don't pay the loan back, the pawnshop has no recourse for payment other than to take ownership of your collateral. You face no legal requirement to repay your loan.

If you can't repay the loan, but don't want to lose your pawned item, you can usually extend the contract. State laws regulate the interest and terms of these new contracts.

What are the requirements for a pawnshop loan?

Aside from possessing a valuable piece of collateral, you need to meet a few other requirements. You must:

• Be at least 18 years old
• Present a valid government-issued ID, like a license or passport
• Show you are the owner of the collateral

As for the last item, the pawnshop owner will likely ask you to provide a receipt or show some other proof of ownership that demonstrates you are the rightful owner of the item up for collateral. Some pawnshop owners may also require you to fill out a form that describes how you acquired the item.

What you can pawn

Outside of stolen, illegal, or counterfeit items, you can try to pawn almost anything. It's really up to the pawnshop owner to accept or reject it.

If you have an item of value at home collecting dust, and you truly won't miss it, consider selling it outright. Remember, pawnshops don't just make loans. They also act as buyers and sellers, which can make them more fun to visit than a bank or credit union.

Popular pawnables

• Jewelry
• Precious metals
• Electronics
• Gaming consoles
• Firearms
• Tools
• Musical instruments
• Sporting goods
• Fitness gear
• Camping gear
• Rare coins
• Designer clothes
• Famous or historic letters or documents

Store selection

As you narrow down the shops you may want to do business with, learn what they specialize in. Don't bring a bicycle to a pawnshop specializing in jewelry or firearms.

Also, know the shop's reputation. The pawnshop where you bring your merchandise should be clean and inviting. Check its standing in the community with your local Better Business Bureau (BBB) or chamber of commerce.

Pros and cons of a pawnshop loan

Drawing up a list of pros and cons is fairly easy. Weighting each pro or con correctly, however, is the difficult part. How do you put a price on sentimental value? Is paying a triple-digit APR, even if only for a short time, a deal-breaker?

Here's a list to get you started:

Alternatives to pawnshop loans

Common sense may dictate that if it's a small amount of money you need to tide you over for a short period, why not ask a friend or family member for the money via a gift or a family loan? If you don't want friends or family to know your business, look for other financial options.

• Instead of getting a loan from a pawnshop, sell your valuables to the pawnshop directly.
• If you don't need same-day cash, you may get a better price by selling your goods on e-commerce sites like eBay, Craigslist, and OfferUp.
• Using a crowdfunding platform like Kickstarter, GoFundMe, or Indiegogo could offer a cash stream alternative.
• A personal loan or personal line of credit may not be out of the question. Even if you have bad credit, the interest you pay over the life of the loan is likely to be far less than pawnshop loan APRs. You can also build your credit if you pay it off on time.

Tips on navigating financial hardships

• Cut expenses: Move back home, ditch your car, take public transit, stop buying stuff, and focus on experiences over possessions (free Fridays at museums or open university lectures, for example). In the words of humorist Will Rogers, “Too many people spend money they haven't earned, to buy things they don't want, to impress people they don't like.”
• Get a side hustle: Walk dogs, tutor, proofread, deliver meals, assemble stuff for people, paint houses, park cars, bartend, clean windows, etc.
• Talk to your creditors: Your creditors might prefer you pay them something than nothing. Talk to them, explain your situation, and try to renegotiate your debt.
• Talk to a credit counselor: A credit counselor may offer solutions like a debt management plan (DMP). A DMP could result in lower rates on your current debt, waived fees, and/or lower monthly payments. You can find a credit counselor in your area through the National Foundation for Credit Counseling.
• Seek government assistance: If you're struggling to make ends meet, you might be eligible for local or government assistance, such as food assistance, help with housing and utilities, health insurance subsidies, etc. Check out 211.org and usa.gov/benefits.