Disadvantages of Pawnshop Loans

Because pawnshops charge exorbitant rates and fees, they are not a good way to get money.

If you need to raise cash quick, visiting a pawnshop should be one of the last methods you consider. Learn how pawnshops work and the disadvantages in using one to get money.

(To learn about other cash schemes to avoid, see Options to Avoid When You Need Money. To learn about safer ways to get control of your finances, see Dealing With Debt: When You Can't Pay Your Bills.)

How Pawnshops Work

At a pawnshop, you leave your property -- the most commonly pawned items are jewelry, electronic and photography equipment, musical instruments, and firearms. In return, the pawnbroker typically lends you approximately 25% to 60% of the item’s resale value. The average amount of a pawnshop loan is about $75–$100. You are given a short time, typically a few months, to repay the loan and are charged interest, often at an exorbitant rate.

Cons of Pawnshop Loans

Here's why using a pawnshop is almost always a bad idea:

Exorbitant interest and fees. Although you borrow money for only a few months, paying an average of 10% a month interest means that you are paying an annual interest rate of 120%. Interest rates may vary from 12% to 240% or more, depending on whether state law restricts rates pawn shops can charge. You might also be charged storage costs and insurance fees.

You can lose your property. If you default on your loan to a pawn-shop, the property you left at the shop to obtain the loan becomes the property of the pawnbroker. You are usually given some time, typically 30 to 60 days, to pay your debt and get your property back; if you don’t, the pawnbroker can sell it.

In about a dozen states, if the sale brings in money in excess of what you owe on the loan, storage fees, and sales costs, you’re entitled to the surplus. But don’t count on getting anything.

This is an excerpt from Nolo's Solve Your Money Troubles: Debt, Credit & Bankruptcy, by Margaret Reiter and Robin Leonard.

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