Payday Loan Alternative: Pawnbroker

When desperate for cash, some turn to pawnshops or pawnbrokers for help. Pawnbrokers are similar to payday loans in that they provide small, short-term cash loans in times of financial emergency. However, the loans obtained from pawnshops have several very important differences from payday loans that borrowers need to know. In this post, we’ll discuss pawnbrokers in more detail and evaluate how they compare with payday loans as an emergency source of cash.

What Is a Pawnbroker?

A pawnbroker, a term usually used synonymously with pawnshop, is a person or business that offers cash either in the form of secured loans or as payment for the sale of personal property. For people who are interested in trading goods rather than receiving cash, pawnbrokers also allow customers to exchange personal property for store credit. To receive cash from a pawnbroker, a borrower has two options. First, the borrower may present an item to the pawnbroker to sell. The pawnbroker assesses the item’s condition and saleability and then, if the pawnbroker wants the item, makes the seller an offer. Alternatively, if they have the proper license, pawnbrokers can also offer secured loans that use a piece of the borrower’s property as collateral. The broker still charges interest on these loans and retains ownership of the property until the loan is repaid in full.

An Example

Common items used for collateral in pawnbroker lending include car titles, electronics, jewelry, musical instruments, etc. As an example, say a borrower brought in a guitar worth $4,000 to a pawnbroker with the desire to obtain a secured cash loan. Pawnbrokers typically egregiously undervalue the items their customers present, so the broker estimates the guitar’s resale value to be $2,000. Brokers usually do not lend more than 20%-50% of the collateral item’s value in cash, so the broker agrees to loan you $1,000 in cash for six months with an interest rate of 10% per month. At the end of the six months, you will have to repay the broker $1,600 in order to reclaim possession of the guitar, assuming you are able to come up with the money. In other words, you will have paid $600 just to get a $1,000 loan.

The Dangers of Pawnbrokers

Using a neighborhood pawnbroker to get quick cash may be convenient, but borrowing this way is also risky for several reasons:

• Unlike payday loans, you must present an item of personal property, or collateral. You risk losing this item if you cannot repay the loan.
• Pawnbrokers provide extremely low valuations for pawned items.
• You will not be able to borrow more than 25%-50% of the value the broker declares your item to have.
• The lending charges on pawnbroker loans are still high, despite the fact that the loan is secured by property.
• If you pawn an item, the pawnbroker will give you a pawn receipt that proves that you own the goods you pawned. If you happen to lose this receipt, you may not be able to retrieve your collateral without extreme difficulty.