6 Reasons To Avoid Pawn Shop Loans

When you find yourself short on cash, it can be tempting to go through your attic and choose personal belongings to sell for a quick turnaround. While pawning off Grandmother's opal ring might seem like a good idea, the concept of pawn shop loans might not fit your financial needs long term.

Pawn shops are an interesting cornucopia of treasures; you can find everything from electronics to engagement rings and discarded musical instruments, with shops offering cash loans in exchange for your belongings.

How pawn loans work

When you bring an item in, your pawnbroker will consider that as collateral, and assess the value of your item as compared to similar items in the shop. He will then give you a loan based on the perceived value of your item, hanging on to your item as collateral while you pay off the loan and complete the terms that you've agreed upon.

The appeal of a pawn loan is that you are at risk of losing your item should you fail to pay it back. There is also no negative credit reporting for failing to pay back the loan. While they may seem like a good idea in theory, there are some drawbacks to obtaining pawn loans. Consider the risks before putting your treasured family heirlooms up for grabs:

1. Loan amounts may not be satisfactory

Let's say that Grandmother's pearl necklace is valued at $800. Realistically, there is no way that most pawnbrokers are going to give you a loan for exactly what your item is worth. With statistics showing that the average pawn loan is $150, it simply doesn't pay for you to let a more expensive item go if there is the slightest risk that you won't be able to fulfill loan terms.

2. Cost to benefit ratio might not benefit you

The longer you take to pay the loan back - with interest - the more money you will end up paying in the long run. Many pawnshops find loopholes in state interest mandates and find ways to charge additional fees on loans, costing you even more money. Think carefully before entering into a contract with a broker that could cost you time and money.

3. You could lose your belongings

Most of us don't enter financial contracts with the thought that we could potentially default on them. Even the best-laid plans can go awry; you could stand to lose some pretty sentimental and significant belongings, ones that would be painful to lose. Ask yourself if you are willing to lose an item to make a quick buck.

4. Interest fees are over the top

Even with a seemingly modest fee of 10 percent interest per month, you are facing an annual interest rate hike of over 120 percent, which is absolutely unacceptable in the business world. What they also might not tell you before signing is if you miss or make late payments, these interest rates can skyrocket into the 30-40 percent range, which will be almost impossible to stay on top of once it has switched over. Know what you are getting into before entering into an agreement, and do some simple math to determine if you are even on board with the total amount you'll have to pay back before completing the loan term.

5. Some brokers operate illegally

Many states have begun to crack down on pawnshop operations, but that doesn't stop all of them from engaging in illegal practices. If you choose to enter into a contract with a broker, know what the terms and conditions are before you sign on the dotted line, and be sure to report any suspected "changes" to state and local authorities; you don't want to be an unfortunate victim of unfair lending practices.

6. There might be better alternatives for you

Finding yourself in a tight financial spot is not something anyone desires; you might think that your options are limited, and that you have no choice but to take out a pawn loan.

Consider an online personal installment loan, which can help you in several ways:

  • It can help to improve your credit score with on-time payments reported to credit bureaus
  • This type of loan has longer terms and payments that most people can afford
  • Terms and conditions are very clear, allowing you to make an informed decision as to whether you want to enter into that type of contract

Knowing what your options are for obtaining cash when in a pinch will be helpful in making sure you can climb out of your temporary struggle. Do some investigating of other loan options and opportunities for earning some extra cash that will place you in a better position for long term financial success.

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