The Pros and Cons of Pawnshop Loans

Once your life gets sucked into a pawnshop, it is extremely hard to kick the habit. A lot of people are aware of that, but they have nowhere else to go to. When people have no credit, no bank account, and have run out of sources as well as people to borrow money from, where else can they go but to a pawnshop? Pawnshop loans, like everything else, have both upsides and downsides. If you are considering getting a pawnshop loan, you should read this first before making your decision.

Brief History of the Pawnshop Business

Pawnshops date back at least about 3,000 years to ancient China. The word "pawn" derived from the Latin word "patinum" which means "clothing," because in the old days people pawned their clothes to borrow money. In the United States, pawnbroking declined from the 1930s to the mid 1970s, as other credit options, such as credit unions and finance institutions, mushroomed throughout the country. By the mid 1970s, however, the pawnshop industry began to grow dramatically. By 2004, there were about 14,000 pawnshops nationwide and 5 publicly traded chains (EZ Pawn, Cash America International, Express Cash, Famous Pawn and First Cash Pawn). Nowadays pawnshops substantially outnumber both credit unions and banks across the United States.

Pawnshop loans are pretty simple business transactions. A pawnbroker makes a fixed-term loan to a customer who uses his/her collateral (jewelry, electrical appliances, cell phones, etc.) to guarantee the loan. There is no credit check, as the loan is secured by the collateral. Then the pawnbroker will give the customer a pawn ticket with his/her name and address, a description of the pawned item, the loan amount and the maturity date. The local police will also get a copy of the receipt. Pawnshops allow customers to borrow on the appraised value of an item for a period of time, often 30 days. However, pawnshop loans are usually renewable. At some pawnshops, customers can extend the loan indefinitely by paying only the interest. Customers can get their pawned item back when the loan + interest are repaid. If a loan is not repaid, and no monthly interest payment is made, the broker will appropriate the item and cancel the debt.

• It is quick and convenient. There is no credit check, and a co-signer is never required. As long as you have a collateral to guarantee the loan, you will be fine.
• It won't ruin your credit score if you don't make a payment. In case you decide not to redeem your pawned item, the broker will just appropriate and sell it. There is no follow-up, no credit agency report, no collection agencies and no harassing phone calls.
• You can negotiate the loan amount you'd like to get. Normally, pawnbrokers will try to take in items cheaply, but sometimes the amount offered can be boosted a little, especially if the item is easy to resell and you are a good talker.

• Appraisals are usually low; a pawnshop loan is typically about 30% - 50% of what a broker expects to receive if he/she has to sell the item. Jewelry is usually appraised at wholesale value, guns at about 60% of blue book value, electrical appliances at only 10% - 30% of their original cost. For example, if you pawn your $6000 diamond ring, the loan you get may be as low as $200.
• Interest rates are outrageous. Pawnshops lend money at an APR of 120% - 300%, depending on the state's usury laws. Some states also allow pawnshops to add other charges and fees such as storage, insurance and service. Some states even allow pawnbrokers to require a new service every time a loan is renewed. That's why some people end up paying $4,000 to reclaim $1,000 worth of collateral.
• The pawnshop business ignites a rise in the fencing of stolen goods. Although pawnshops are supposed to be regulated by local goverments and cooperate with local police departments, there are still so many stolen items wound up in pawnshops. Most of them are pieces of jewelry which are very difficult for the police to recover, as stones can be removed and reset, and gold can be melted down. There's also a chance that some pawnshops will either box up jewelry like that or ship it out of state.