What Is a Pawnshop Loan?

A woman wearing a flannel shirt smiles at her phone while she's in the kitchen.

Pawnshop loans may appeal to people if they can't qualify for a conventional loan or they live somewhere that's underserved by traditional financial institutions like banks and credit unions. For some folks, pawnshop loans are a quick, convenient way to borrow money. In part, that's because about 10,000 pawnshops operate around the U.S.

However, pawnshop loans may lose their appeal when you realize that they come with high fees and won't help you build credit.

What Is a Pawnshop Loan?

A pawnshop loan is what's known as a collateral loan.

To borrow money from a pawnshop, you provide an item as collateral—such as jewelry, a TV or a musical instrument—and the pawnshop provides a loan based on its appraised value. If you don't repay the loan as agreed, the pawnshop can keep your collateral and resell it to recoup their losses. In many cases, the shop will lend 25% to 60% of the resale value of the collateral.

The average amount of a pawnshop loan is $150, according to the National Pawnbrokers Association. A pawnshop typically gives you 30 to 60 days to repay a loan.

In addition to repaying the amount you borrowed, you'll also be responsible for paying fees that can be much higher than with other borrowing options. Say you provide a gold ring worth $400 as collateral, a pawnshop may extend a $200 loan for 30 days at a cost of $25. That's equivalent to an annual percentage rate (APR) of about 152%. APRs for personal loans commonly range from 6% to 36%. And the average APR for a credit card that charges interest was 16.3% as of May 2021, according to the Federal Reserve.

Interest rates for pawnshop loans vary based on where the pawnshop is located. For instance, many towns in Massachusetts limit the APR for these loans to 36%.

Pawnshop Loans and Collateral

The repayment term, interest rate and other details are explained in the "pawn ticket" that the shop hands you when you take out a loan. Be careful with the ticket. If you lose it, you might not be able to claim your collateral.

If you can't repay the loan within the payment period, you might be able to extend the loan—but with more interest and fees attached. If you can't pay off the loan at all, you'll have to surrender the collateral.

Once you pay off a pawnshop loan, you can retrieve the item you offered as collateral. An average of 85% of borrowers successfully pay off their loan and pick up their collateral, according to the National Pawnbrokers Association. If the collateral goes unclaimed, it becomes the property of the pawnshop. The shop then sells the item, normally at a deep discount compared with the item's retail value.

Requirements for a Pawnshop Loan

Unlike traditional loans and credit cards, pawnshop loans come with few requirements. For example, you generally don't need to:

  • Fill out an application
  • Provide financial information
  • Show proof of employment

A pawnshop also won't run a credit check before issuing the loan. Because the pawnshop won't report your payment history to credit bureaus, the loan won't have any effect on your credit score—for better or for worse. So, if you're trying to build your credit, a pawnshop loan won't help.

Alternatives to a Pawnshop Loan

Given that pawnshop loans can charge high fees, you might want to look at alternatives (but stay away from high-interest payday loans and title loans). Here are five alternatives to a pawnshop loan.

1. Sell Your Valuables

Rather than pawning jewelry or other valuables, you might consider selling your stuff to the pawnshop instead. However, pawnshops buy goods with the intention of selling them and making a profit, so you might not get as much for it as you would from a private buyer. You can find a buyer and sell valuables yourself through platforms such as Amazon, Craigslist, Decluttr, eBay, Facebook Marketplace and TheRealReal.

2. Use a Credit Card

If you need to cover expenses quickly, you might turn to a credit card. The APR for a purchase or cash advance likely will be well below the APR for a pawnshop loan. On top of that, a positive history of making payments on the card can help lift your credit score.

3. Take Out a Personal Loan

A personal loan normally doesn't require collateral. Plus, the APR should be much lower than the APR for a pawnshop loan. And if you pay off the personal loan in a timely manner, it could help you build your credit.

Some lenders offer emergency loans or loans for people with bad credit. Be sure you compare interest rates and terms on any loans you're considering. Experian CreditMatch™ can provide personalized loan offers.

4. Get a Payday Alternative Loan

Credit unions offer payday alternative loans (PALs). Similar to payday loans, PALs are short-term, small-dollar loans that often don't require good credit. You will need to show proof of employment and income, though.

With a PAL, you can borrow $200 to $1,000. The loan comes with an application fee up to $20 and a one- to six-month payoff period. APRs for PALs normally are similar to those for credit cards.

5. Secure a Personal Loan From a Peer-to-Peer Marketplace

Online lending platforms platforms pair prospective borrowers with investors who are willing to lend money. APRs for loans from peer-to-peer lending platforms can vary depending on your creditworthiness.

Credit requirements for peer-to-peer loans may not be as strict as credit requirements for a traditional personal loan. Some loan providers may have offers available to those with poor credit or better.

What to Do if You're Having a Tough Time Paying Bills

If you're looking at a pawnshop loan, chances are you're experiencing financial difficulties. Maybe you need some quick cash to cover the rent or pay an overdue electric bill. Other than sifting through alternatives to pawnshop loans, what else can you do? Here are four options.

1. Trim Expenses

It might be hard to cut costs when you're already struggling, but you may be able to find ways to save money, such as giving up subscriptions to streaming services or eating all of your meals at home.

2. Make Money Through a Side Gig

Even temporarily, you might consider taking on a side gig to pull in extra money. You may, for instance, try online tutoring, driving for a ride-hailing or food delivery service, or part-time freelance work. That little bit of extra dough could get you over your financial hump.

3. Ask About Payment Plans

Squeezed for cash? Behind on credit card or loan payments? If so, reach out to your creditors and see whether they'll agree to a payment plan. This type of plan can lower your monthly payments over a certain period of time, giving you some financial breathing room.

4. Get Help From a Credit Counselor

A nonprofit credit counseling agency may be able to throw you a financial lifeline. A credit counselor can help you create a plan to pay off your debt more quickly, come up with a household budget and, if necessary, negotiate terms and interest rates with your creditors. Most of these services come at little to no cost.

The Bottom Line

A pawnshop loan may seem like an ideal way to quickly address a financial need. However, this solution may come at a hefty price, considering the high APRs for these loans. Before you decide to give up your grandma's gold necklace—at least temporarily—as collateral for a pawnshop loan, examine lower-interest alternatives like a credit card or a personal loan. You and your wallet may be better off for it. Checking your credit report and score to see where you stand can help you better understand your options.