Pros and Cons of Pawnshop Loans
Pawnshops are another source of financing, especially for people with poor or non-existent credit. If you’ve ever needed a quick source of cash, then you may have considered visiting one. But before you do, there are a few things you need to know about pawnshops and the short-term loans that they offer.
- Fast and accessible It’s so easy to get a short-term loan at a pawnshop. Just walk in with the item you want to pawn, have it appraised, and then get the money based on the value of the appraisal. There are no credit checks or mountains of paperwork to deal with, so that means you can get a short-term loan even if you have poor credit. And since pawnshops are everywhere, getting a loan is quite convenient.
- Defaulting won’t hurt your credit score If you fail to pay your loan at the end of the term (the minimum term length in Australia is three months), it won’t affect your credit score. That’s because pawnshops don’t report to credit bureaus or–as mentioned earlier–make credit checks. You won’t deal with collection agencies and harassing phone calls either. However, the item you placed as collateral becomes the property of the pawnshop.
- You can negotiate the value of the item While pawnshops have its own way in determining the value of the item you’re hocking, you can still negotiate the loan amount to get a higher loan. If you take the time to visit a few pawnshops, you can get several estimates and bids, which you can use as a bargaining chip when negotiating.
- Appraisals are incredibly low Since pawnshops need to profit from the items they purchase and resell, appraisals are very low. Jewellery, for instance, are typically assessed at wholesale value, which is the price offered by manufacturers to retailers. At best, wholesale value would be half of the retail value.Electronics, on the other hand, are usually appraised at only 10 per cent to 30 per cent of their original value, while firearms are at 60 per cent. So for example, if you’re selling your Xbox 360, which you bought at $199, you can probably get $19 to $59 for it.
- Interest rates are very high On average, the short-term loans provided by pawnshops have a maximum interest rate of 4 per cent monthly, thanks to the Consumer Credit Act. This means the loan’s APR is around 48 per cent, which is the same as those in payday loans. Let’s not forget that some pawnshops also have storage and service fees, and even insurance charges, depending on where they are.
- You can lose the item you pawned The biggest problem among people who go to pawnshops for short-term loans is that they can lose the item they hocked. This is the very reason why pawnshops don’t run after defaulting customers–they can resell the collateral and still make money out of it. So if you’re short on cash, don’t pawn an item with sentimental value.
- The pawnshop can reject the item you’re hocking Take note, however, that going to a pawnshop isn’t a guarantee that you’ll have money when you walk out its doors. The pawnshop has the right to refuse whatever you’re trading in, like for instance, if the appraisal determined that the item is a fake.