Pawn Shop Loans

Let’s talk about pawn shop loans.

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Sometimes interest rates can be extremely high, even for secured loans.

For some fast cash, pawn shops actually take possession of some of your property and hold it as collateral to guarantee a high interest loan. Giving up collateral often makes a credit check unnecessary because if the borrower defaults, the pawn shop may sell the collateral and keep the proceeds.

Items that many people use as collateral at pawn shops include:

  • Wedding rings and other jewelry
  • Tools
  • Cell phones
  • Electronic devices
  • Guns
  • Musical instruments

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The problem with pawn shop loans is that they typically charge about 120% per year (or about 10% per month). That rate is so high that in 1 years’ time, the amount of interest you pay could be more than the amount you borrowed in the first place. This is like paying for the pawned item twice, once for the interest for that year, and then again to get the item out of the pawn shop. Some pawn shops now serve customers online, where even larger amounts of money may be lent.

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In Real Terms

For a $500 loan with you paying just the 10% monthly interest as it came due, and then redeemed the item at the end of 1 year, you would have repaid the original $500 PLUS an additional $600 for interest.

Even if you paid EXTRA money each month to pay off the loan with equal payments throughout the year, you would still repay the original $500 plus an additional $380 just for interest. If you default on one of these loans, the pawn broker may keep the item and sell it in his store.

To recap, pawn shop loans are tempting because they are fast and easy, but they come with dangerously high interest rates.

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