How pawn shops work

In economies in which money is scarce, many people turn to pawn shops to generate income. For many people, how pawn shops work is a mystery but it’s actually a simple process. The advantage of pawn shops is that you receive instant cash for your valuables. The problem comes if you’re unable to redeem your valuables in the specified time or at least pay the interest to roll the loan over to the next month. If either happens, you may lose your valuables. The question is whether trading your valuables (on a temporary basis) for a cash loan is worth it.

The Pawn Shop Premise: How They Work

Pawn shops work a lot like car title loans if you’re familiar with them. You bring your valuables to the pawn shop (jewelry, electronics, tools, musical instruments, etc.) where an employee appraises your items. Keep in mind, pawn shops will not loan you the full value of your items. You can expect about 1/5th to 1/4th of the value of the items you are pawning. If you accept their offer, your valuables stay behind as security for the loan, and you leave with cash.

The interest rates pawn shops charge varies from state to state, but don’t expect any bargains. You’ll pay a high interest rate for these loans. Pawning is an expensive proposition.

How to Redeem Your Item

You can get your items out of pawn the next day if you’ve got the money. It’s important to remember how pawn shops work: interest on a pawn shop loan accumulates over time and can become quite a bit if the loan is in force for a while. If you are able to retrieve your item in a short time, pawning might be an excellent way to get the cash you need for emergencies even if you have bad credit. Don’t forget to compare the funds you spend on pawn interest to the amount you pay for say, several overdraft fees. Whichever is less is the way to go.

Family, Friends and Pawning

Another way to get the funds you need in an emergency is to ask friends and family. Offer them interest and a scheduled payment plan and it will go a long way to a yes. One of the best things about getting a loan from family and friends is that even if they charge you interest—a reasonable action—it will no doubt be lower than what you’d pay at a bank and far less than at a pawn shop. The other beauty of borrowing from loved ones is that there’s no credit check though don’t be surprised if your loved one wants a promissory note. Of course, it’s integral that you repay the loan in full or you may not be talking to one another this time next year.

Pawning: Not the Only Deal in Town

Pawn loans and car title loans—both of which are secured by your property—are not your only options. There are many Internet lenders who don’t require that you secure your loan with collateral and loan up to $2,500. Keep in mind, to get a short-term or signature loan from an Internet lender you must have a valid checking account and a consistent source of income. The upside is that most Internet lenders don’t check your FICO credit score, so even people with bad credit can get one of these personal loans.

When you need cash for an unexpected expense, the stress of the situation makes it hard to reach a decision you can feel good about. Consider doing your research on pawn, car title and short-term loans before your next emergency.

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