How Do Pawn Shop Loans Work?
Like most of us, you have probably been in a situation where you needed some cash urgently.
It sucks I know. But what to do?
An option to consider when you’re under financial pressure would be to look for a pawn shop. But you need to have some item of value which you may not have been using that much. And exchange it for cash. However, though you could complete the transaction in minutes and walk away with some money, it’s imperative you fully understand the dynamics of a pawnshop loan.
Be it as it may, a visit to the pawn shop is nothing to be embarrassed about, but you need to learn all there is to know about how pawnshop loans work.
Why a Pawn Shop?
Pawn shops are not as bad as they are portrayed.
Popular culture often depicts pawn shop as some seedy, grimy, dark places run by sinister criminals. And this impression created in the minds of people can be hard to remove. But nothing could be further from the truth.
Instead, pawn shops are legitimate operations and are highly regulated.
There are about 14 Federal statutes and regulations, in addition to numerous state and local laws that govern the operations of pawnshops. According to Mr. Emmett Murphy, the spokesperson for the National Pawnbroker Association (NPA), pawn shops are generally clean well-lit spaces managed by people who aim to provide excellent customer service.
To find a pawn shop close to you, Mr. Murphy advises that you check out the NPA’s website for member shops. Or you can check with the local Better Business Bureau.
So now you have located the pawn shop, what’s next?
What You Need to Know About Pawn Shop Loans:
- Pawn shops loans require a security. This just means that you drop something of value with the shop as collateral. You present some item you own, and the pawnbroker appraises it. If it passes his scrutiny, he will offer you the loan. He then keeps your article until you completely repay the loan. The loan will likely be just a fraction of the value of the pledged item.
- You can “pawn” or sell your item directly to the pawnshop. But pawnbrokers are more interested in lending money to you because it has potentials for more profit for them.
- Ensure you receive a pawn ticket. This is a receipt for your security item as well as a record of the terms of the loan: expiry date, item description, and fees, etc.
How are Pawn Shop Loans Repaid?
There are two ways a pawnshop loan transaction can end:
- You can pay the outstanding balance with the loan principal, interest and fees before the expiration of the term of the loan. Pawn shop loans are usually short termed – 1 to 4 months from when you collected the money.
- You don’t repay the loan, and the pawn shop gets to keep your item. Apart from losing possession of your item, there are no further consequences if you don’t pay. Your credit score is not affected, and no collection action is taken against you. However, according to the national Association Pawnbrokers, about 80 percent of customers return to repay and collect their items.
In some areas, you can choose to extend the loan repayment by some months, but this will attract additional charges.
How Much Interest Do You Pay?
Determining the interest and fees payable on a pawn shop loan may not be as straightforward as other forms of lending. This because the regulations on pricing vary from State to State and it’s not calculated as a fixed interest rate.
Then again, for pawn shop loans, the term “interest rate” may not exactly apply. To get a proper understanding, it’s better to think of it as “finance charges.” The finance charges are almost entirely state-regulated, and these finance charges can vary from 5 percent per month up to 25 percent per month. For example, in Indiana, “the interest rate” doesn’t exceed 36 percent APR or 3 percent per month.
Pawnshops are allowed to charge an extra 20 percent per month service charge, bringing the total allowable “finance charges” to 23 percent per month.
However, these maximum finance charges are seeing a voluntary reduction by pawnshops as the industry rapidly evolves. This is most especially true for large volume loans that are becoming quite common. These large ticket loans are usually taken for life emergencies and are referred to as “safety net loans.” The fees are typically lower than the penal cost of a bounced check or a disconnected utility.
You should take time to go through your States’ pawnbrokers association website for detailed information about the maximum rates, rules governing the pawn shop transactions and any other information that may be of help. This can be found under the consumer protection section of the website.
In summary, you should make sure the pawnbroker explains all the fees involved in details before you conclude the loan transaction. All the agreed terms should also be spelled out on your pawn ticket.
What Sorts of Items Do Pawn Shops Want?
Before going in for a pawn shop loan, bear in mind the following:
- Your pawnbroker may not accept outdated items, hard to store or cheaply made items.
- Pawnbrokers love jewelry, firearms, coins, high-quality tools, and musical instruments.
There May Be Some Bureaucracy
The pawnbroker is under a legal obligation to confirm if you’re the true owner of the property intended for collateral. You might have to undergo some interrogation to ensure the item thus presented is legally owned by you.
You should not be offended because the pawnbroker is merely trying to ensure the transaction is legitimate.
Also, go along with your government issued ID as required by law.
While being short of cash when you most need it is a situation to be avoided. It sometimes does happen. However, with some advanced preparations, your pawn shop loan transaction should be a walk in the park.
How about you? Have you visited a pawn shop before to pawn something or to actually shop there?