What is a pawn shop loan? (2024)

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• Pawn shop loans offer instant cash in exchange for collateral the shop might want to sell.
• These loans are usually small amounts and don't require a credit check to qualify.
• The cost of pawn shop loans can be high, but in some situations they can offer financial leeway.

If you've ever needed money in a hurry, but don't have the best credit, you might have considered a pawn shop loan. Pawn shop loans allow customers to get instant cash in exchange for collateral — whatever the item is that they offer to the shop.

While there are alternatives for borrowing small amounts of money quickly, including personal loans for bad credit, a pawn shop loan might be right for you if you. If you can repay it on time, you'll get your property back. However, there are some caveats to keep in mind.

What is a pawn shop loan?

A pawn shop loan is an agreement in which you offer an object, such as a piece of jewelry, and take a cash payment on a percentage of its value. The pawn shop owner agrees to hold your item for a specific period of time, and you agree to pay back the loan, before that period ends.

As the U.S. Department of the Treasury notes, as a pawn customer you may choose to redeem the loan, which means repaying the loan amount along with interest and any fees. You'd receive your property back as well. If you don't repay the loan, the pawn shop keeps your collateral.

The average pawn shop loan in the US is about $150, according to the National Pawnbrokers Association. However, loan amounts can potentially go much higher, depending on the assessed value of the item you pawn. For example, Hilltop Pawn in Virginia Beach, Virginia, offers pawn loans of up to $50,000.

These types of loans are non-recourse, meaning the pawnbroker can't demand you repay the loan. They're also completely based on collateral, rather than credit checks or consumer credit agency reporting.

How do pawn shop loans work?

Find an item you own that a pawn shop may find valuable. Jewelry and watches are popular, as well as various collectibles, video game consoles, and musical instruments. Ask a reputable pawn shop what they would offer for your item.

Pawnbrokers assess your items just as they do for customers looking to pawn for a direct sale. They'll examine them for quality and consider the market value for their specific region and store (if you offer an item they don't have, it may fetch a higher price than something they have dozens of already).

Unlike personal loans, there's no affect on your credit score if you don't pay a pawn loan back. However, the particular pawn shop you use may not want to work with you in the future after you've failed to repay a loan. Your other, much bigger, risk is losing the item if the loan goes unpaid.

Pawn shop loans also charge relatively high interest compared to the value of the item pawned, which can make them more effective as a last resort.

Due to the nature of pawn loans, it's common for borrowers to roll over their pawn shop loan or take out a new one. A Consumer Financial Protection Bureau (CFPB) survey showed that in June 2019, 73% of those who had taken out a pawn loan in the previous six months still owed money on it, which indicates either repeat borrowing or loan rollovers.

What are the interest rates and terms for a pawn shop loan?

As with any loan product, you should compare interest rates on the money before borrowing. The rates pawn shops charge on loans can vary widely, but typically they're higher than rates on other types of loans.

For example, Castle Jewelry and Pawn of Richmond, Kentucky states that they charge 20% interest on their pawn shop loans. They require you to pay the interest every 30 days in order for them to hold your pawned item for another 30 days.

Let's say you took out a $200 pawn shop loan on a piece of jewelry. At 20% interest, you'd need to pay $240 within that 30-day window to redeem the item you pawned. Or, if unable to pay back the full loan, you'd have to pay $40 before 30 days are up or the pawn shop would be free to sell your item.

Pawn shops can offer different interest rates, so be sure to clarify with the pawnbroker before making an agreement. As far as the duration of a pawn loan, 30 days is typical, and most shops will require either full repayment or the interest payment by that time for them to continue storing your pawned item.

If you're concerned about defaulting on a pawn loan, the good news is you won't have to worry about long-term impacts to your credit. Since it's a non-recourse loan, your credit score won't suffer, but the real consequence is losing what could be a treasured item.

What are the eligibility requirements for a pawn shop loan?

Pawn shop loans are appealing to customers who might not have access to other forms of credit. About 60% of users of pawn loans, title loans, or payday loans were turned down partially or in full for requested mainstream credit sources, according to the CFPB.

Unlike qualifications for personal loans, pawn loans don't require a credit check or information on financial assets. All you need to get a pawn shop loan is an item of value for collateral and a government-issued ID to prove you're at least 18 years old.

Pawn shop loan pros and cons

Every loan product has benefits and drawback, so here's a quick guide to some of the key factors to consider:

Pawn shop loan alternatives

As Bernstein explains, pawn shop loans can be a financial lifeline. But remember that customers are "trading quick cash for only a fraction of their item's true value." So it's key to figure out what your best solution is.

In a situation where you require immediate cash but don't fit the qualifications for a traditional short-term loan, a pawn shop loan might be appropriate. It's especially useful if you're certain to receive income within the 30-day loan period with which to repay the debt.

However, there are some alternatives to pawn shop loans that may fit your needs better.

• Title loans: These are loans that use your vehicle as collateral, possibly for larger loan amounts. However, this means your car can be repossessed if you don't repay the loan.
• Payday loans and cash advances: Payday loans and cash advances are short-term loans in which you give a check to the lender for the amount you need to borrow, plus their fees. The lender gives you cash, and you must repay the full amount within a short time, such as two weeks.
• Lines of credit: You may be able to get a personal line of credit through your financial institution, although these usually require a good credit score.
• Private sale: If you're willing to part with a valuable item, you can sell it outright to the pawn shop or negotiate a private sale. That allows you to receive the item's full resale value.
• Ask an acquaintance: Since pawn loans tend to be small-dollar loans, you might ask a friend or family member to float you the money. Borrowing from someone you know has pitfalls, but can be a valid option.

Pawn shop loan FAQs

"Pawn shop loans can be a double-edged sword," says Jorey Bernstein, founder and CEO of Bernstein Investment Consultants. "They offer immediate relief in times of financial distress but carry the risk of losing cherished possessions if repayment isn't possible."

Ultimately, if you're truly in a pinch and your credit isn't great, a pawn shop loan may be a way to float through if you're absolutely sure you can get the money to repay it on time or are comfortable with the idea that you might lose what you put up for collateral if you can't.