The Dangers Of Pawn Shop Loans

The Dangers Of Pawn Shop Loans

When looking to raise funds fast, like for an emergency, some people result to selling some of their belongings at throw-away prices. But sometimes, selling may not get you the funds you need fast enough, so you hand over those items to a pawnbroker in exchange for an instant loan with a ridiculously high daily or monthly interest rate.

However, there are a few benefits of pawnshops:

  • Compared to payday loans, pawn shop loans have lower interest rates. But the rates are still higher than high street bank loans.
  • The transaction is also simple and direct. You give the pawnshop a valuable item such as a piece of jewelry, laptop, or TV as collateral in exchange for a percentage of the items value in cash. The money is usually awarded on the same day.
  • You have access to quick cash regardless of your credit rating. You save a lot of time that would otherwise have been spent looking for favourable terms from another lender, with still no guarantee of receiving the loan.
  • If you’re unable to pay and the item is sold at a loss, the pawnbroker may not necessarily pursue you to offset the balance. That said, you should enquire from your pawnshop whether that will be the case.

Although pawn shop loans may allow you to cater for financial emergencies, they often leave you in worse shape than when you started.

Why are pawnshop loans dangerous?

Pawnshops charge very high interest rates and other fees for a loan that is only a fraction of the value of the collateral – possibly 50 percent. If you are not able to pay the full loan amount plus interest and fees at the end of the loan period, the pawnshop may choose to keep the item and sell it.

Whether or not you are able to repay the loan plus interest does not necessarily make the deal any better. At the end of the transaction, you will have lost a lot more than if you had opted to trade that item through other means.

Be careful when dealing with pawn shops

It is important that you establish the value of the item you are giving as collateral before pawning it. Use evidence of similar items from newspaper clippings and/or second-use stores to set the price. This will ensure that you get a fair amount from pawning the item, and prevent the pawnbroker from claiming that they sold the item for less and were unable to recover the loan amount.

You don’t have to subject yourself to further losses just to take care of a financial emergency. Rather than taking risky, high-interest loans, consider alternatives such as credit consolidation. But to help you get out of financial trouble in the long-term, you should consider debt counselling. Speak with a licensed insolvency trustee today to learn more.

Speak to an expert today.