Should You Ever Take Out a Pawn Shop Loan?

Pawn shop sign in neon.
•••

 Joe_Potato/Getty Images

If you’re looking for some fast cash to cover a tight patch or unexpected expense, you might be considering a pawn shop loan. But do they make sense? The short answer is: probably only as a last resort. Pawn shop loans can be very expensive. If you borrow $100 for 90 days, you could have to repay up to $175. 

Personal loans, credit cards, and other alternatives are typically much more reasonable ways to borrow money. There are some types of loans with even more excessive rates (like payday loans), but pawn shop loans are still among your worst options. 

How Pawn Shop Loans Work

Pawn shop loans are secured short-term loans. When you borrow money from a pawn shop, you bring valuables such as jewelry or musical instruments to pledge as collateral until you repay the loan. You don’t need a certain credit score or income to qualify. Instead, the pawnbroker approves your loan based on the value of your collateral, knowing they will sell the item if you don’t repay. Here are some of the basics of pawn shop loans:

  • They’re usually for small amounts: The average pawn shop loan in the U.S. is for about $150, according to the National Pawnbrokers Association.
  • There are no credit requirements: Pawn shop loans do not rely on your credit history, and failing to repay a pawn loan does not affect it.
  • The borrowing costs are high: Pawn shops charge interest and in some cases processing or storage fees when you borrow money, and the costs vary widely. Generally, this is an expensive type of loan. You’re often charged monthly, up to limits set by state law, and the fees are considered part of the overall borrowing costs in many states.
  • The repayment periods are short (and optional): You often have 30 to 90 days to repay a pawn loan, but unlike many other types of loans, paying it back is optional.

If you don’t repay, the pawn shop can sell your property to somebody else. 

Should You Borrow From a Pawn Shop?

Pawn shop loans provide quick cash, but you pay a price for speed and convenience. Although states regulate pawn shops, some have very high caps on fees.

Georgia, for instance, caps the combined interest and fees at 25% of the principal per month for the first 90 days and 12.5% per month after that. Florida’s combined limit is 25% a month no matter the term of the loan, and Texas lets pawn shops charge as much as 20% a month, depending on the amount of the loan. Other states are better. In New Mexico, charges cannot exceed 10% for the first 30-day period and then 4% for any remaining period.

Keep in mind these are monthly charges, so when translated to an annual percentage rate (APR), they can be 240%-300% or more, compared with 20% for a credit card, for instance. Looked at another way, if you borrow $100 for three months, the financing could cost you $75 through a pawn shop and $5 with a credit card.

That said, you could do worse. While payday and auto title loans are usually for very short periods of time—maybe just two weeks—the equivalent APRs can be crazy. A payday loan, which is borrowed against your next paycheck, can charge an effective APR of close to 400%. And auto title loans may have an effective APR of at least 300%. Plus, if you miss payments, the lender can take your vehicle.

You could easily pay $125 to borrow $500 for a month using a payday loan, auto title loan, or even a pawn shop loan, depending on the caps set by your state. Pawn shop loans in states with lower limits may charge you $50 to borrow that amount. 

Alternatives to Pawn Shop Loans

Before borrowing from a pawn shop, evaluate your alternatives. 

Payday Alternative Loans (PALs): If you belong to a credit union, you may have access to PALs, which provide short-term funding of $200 to $1,000. Government regulations limit application fees to $20, and the APR is capped at 28%.

Personal loans: With a personal loan, you can borrow money without using collateral. You need to show you have enough income, and lenders typically review your credit history. APRs can be in the single digits, though some are well above that.  U.S. Bank, for instance, charges $48-$60 to borrow $400 for three months, for an effective APR of more than 70%.

With major online lenders, you might need to borrow more than you need, but some brick-and-mortar institutions allow you to borrow less than $1,000.

Credit cards: If you have credit card accounts, you can borrow instantly by paying with a card or taking out a cash advance. The average APR on a credit card is just over 20%. Be aware cash advances typically require a fee of 3%-5% of the transaction amount in addition to interest.

Negotiate payments: Look into changing or adding a payment plan if bills are adding up. 

  • Student loans might be eligible for an income-driven repayment, forbearance, or deferment
  • Some medical providers allow you to use interest-free payment plans to pay for treatment.
  • Utility providers may offer programs to help ease the burden of payments.

Payroll advance: If you only need a small amount, ask your employer about advancing a portion of your next paycheck. Instead of paying interest and fees, you can simply borrow from yourself. Keep in mind that you’ll receive less on your subsequent paycheck, so this isn’t a long-term solution.

Government and nonprofit assistance: Investigate programs that help with basic human needs like housing and food. Use this interagency website for an overview of benefits programs, or check with your local social services department or nonprofit agencies.

Sell stuff: If you’re willing to part with an item permanently, consider selling it rather than taking it to a pawn shop to avoid paying financing charges. 

Article Sources

  1. National Pawnbrokers Association. "Pawn Industry Statistics," Page 2. Accessed Nov. 18, 2019.

  2. Consumer Financial Protection Bureau. "CFPB Takes Action Against B&B Pawnbrokers For Deceiving Consumers About Loan Costs," Accessed Nov. 18, 2019.

  3. State of Missouri Revisor of Statutes. "367.021. Secured personal credit loans — who may make — interest rate," Accessed Nov. 18, 2019.  

  4. University of New Mexico Judicial Education Center. "Pawn Transactions," Accessed Nov. 18, 2019.

  5. Georgia Department of Banking and Finance. "Pawn Shops/Title Pawn," Accessed Nov. 18, 2019.

  6. Texas Statutes. "Sec. 371.159. PAWN SERVICE CHARGE," Accessed Nov. 18, 2019.

  7. The Florida Legislature. "Chapter 539 - Pawnbroking," Section 11 - Pawn Service Charges. Accessed Nov. 18, 2019.

  8. New Mexico Compliation Commission. "Chapter 56 - Commercial Instruments and Transactions (1990)," 56-12-13. Accessed Nov. 18, 2019.

  9. Federal Trade Commission. "Payday Loans," Accessed Nov. 18, 2019.

  10. Federal Trade Commission. "Payday Loans and Cash Advances," Accessed Nov. 18, 2019.

  11. Federal Trade Commission. "Car Title Loans," Accessed Nov. 18, 2019.

  12. National Archives Federal Register. "Payday Alternative Loans," Section 701.21(c)(7)(iii)(A)—Minimum Requirements for PALs I. Accessed Nov. 18, 2019.

  13. National Credit Union Administration. "Payday Loan Alternatives," Accessed Nov. 18, 2019.