How Do Pawn Loans Work?

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If you get a car loan or a mortgage, your vehicle or home serves as collateral against the loan. The car or home gives the lender something to fall back on and some protection if you stop making payments on the loan. When a person stops paying a car loan or mortgage, the lender has the right to claim the property or collateral.

Pawn loans are also collateral loans. When you visit a pawn shop to get a loan, you bring with you something valuable to offer as collateral. Pawn shops accept a wide range of items as collateral, from video game consoles to luxury watches and from firearms to designer handbags. You give the item to the pawnbroker, and they assess its worth and offer you an amount to borrow. If you agree to the loan, you get the cash, and the pawnbroker keeps the item. If all goes well, you return at the expiration of the loan with the cash you borrowed, plus any interest and fees owed. You pay the pawnbroker the cash and get your item back.

Although pawn loans have collateral in common with mortgages and car loans, they are different from the type of loan you’d get from the bank in several notable ways.

• They don’t require a credit check: Traditional lenders often check credit to assess the likelihood of a person paying back the loan. Credit checks can make it difficult for people with bad credit or a limited credit history to get a bank loan. For a pawnbroker, the risk of loss is much lower if someone doesn’t come back to pay off their loan. Since the pawnbroker already has the item in their possession, they can sell it and recoup the money lost on the loan that way.
• They are short-term: Usually, you have 30 days to pay back the amount of the pawn loan plus interest and fees. If for whatever reason, you can’t repay after 30 days, you can extend the term of the loan by paying the interest and fees owed. Personal loans from a bank are usually much longer, often requiring payments for five years.
• They can be for small amounts: It is very unlikely that a bank will give someone a loan under a few thousand dollars. The cost of the application and approval makes micro-loans not worthwhile for traditional banks. But it is possible to borrow a small amount with a pawn loan, even as little as $10, yet all the way up to thousands and even tens of thousands depending on the item used for collateral. How much you can borrow depends on the value of the item you are pawning.
• They won’t affect your credit: If you can’t pay back a credit card, personal loan or mortgage, your credit will take a hit. Since pawn loans do not require a credit check and aren’t reported to the credit bureaus, your credit history won’t be affected if you are unable to pay back the loan. The most that will happen is that you will lose the item you pawned.