Many low to moderate income families are turning to pawn shops for short term loans. The locations, most of which are state regulated, will either allow the person to sell the item on an outright basis to raise the money or the customer can apply for a collateral based loan. Both of the options provide households the ability to raise cash in a short amount of time.
As with many non-traditional lenders, the interest rate that is involved here is fairly high. The rates are generally much higher than on a credit card, but lower than a typical payday lender. So pawn shops do offer struggling families another way to raise money in a short period of time for paying certain bills, but this source of financing will also have pros and cons involved.
As noted, it is always strongly recommended that families seek all other forms of financing before contacting a pawn shop. While they can be one more way to raise some much needed cash, the costs involved to do this can be fairly high and come with risks. After all, these pawnbrokers are for profit-businesses and they to want to make money while mitigating their risk.
The first way to get money from a pawnshop is to sell them the product in question. This involves going to a center and receiving a quote for what is being sold. The trade-in value will more than likely be a small fraction of what the item is worth or what the customer paid for it. But this is the least risky option to the consumer as there will not be a loan or repayment involved. Instead they just lose possession of the goods as they are sold.
Collateral based loans are also available from most pawn shops. This will not only give the person the most value for the item they are selling but it also comes with the most risks. Borrowing money in this fashion will come with an monthly interest rate of 4% to 20%, depending on the state and the amount involved. There may also be a loan origination or transaction fee that needs to be paid.
Residents of some states, such as those that have a 4% monthly rate, can use a pawn shop to raise much needed money, and the rate can even be considered to be somewhat affordable. It compares favorable to some of the most expensive credit cards out there on the market There will also be various state regulations that can protect the borrower, as pawn shops do have rules and laws they need to follow.
When a state does allow the pawn shop to charge closer to 20% per month, this rate starts to approach payday lending levels. That is very expensive and comes with a significant amount of risk to the consumer. However it will be slightly offset by the fact that the borrower needs to put up collateral. So this means that even if the person can't make all of their payments on time, the worst case is that they will lose ownership of what they used as collateral with the pawn shop.
While any dollar amount can be borrowed (provided the value of the collateral justifies it) most people receive a little over $100. This will be a small portion of the item’s retail value, and the pawnbroker will give details on how that amount was arrived at. All different types of goods can be pawned for a loan, including jewelry, electronics, work tools, watches, firearms, TVs, and much more.
The financing is typically short term in nature. Most pawnbrokers will allow at most 4 months to repay the funds. If that terms and conditions are not met, then they keep the item. Technically this is one of the advantages to using a shop as there will not be a long term impact to the borrower's credit rating or additional fees put into place. Instead the pawn shop just takes possession of the item that was involved in the transaction.
There are rules and regulations that protect families. Some are available at the state or county level, and others are mandated by the federal government. In addition to those, the National Pawnbrokers Association has a code of ethics in place to further regulate the industry. More information can be found at www.nationalpawnbrokers.org.
One of the most important federal government laws in place is the Truth in Lending Act (TILA). This will very much protect people that are taking out a loan from a pawn shop. This regulation states that the pawnbroker needs to have clear terms and conditions in place for the borrower. It needs to give the costs involved, APR interest rate, any one time fees, repayment terms, and more. All of the information needs to be clear and concise as per the TILA regulation. Before applying for a collateral lawn, be sure to ask for this document and read all of the fine print very closely.
There are also state consumer protection agencies that have additional regulations on pawn shops. This will often require the business to have a license in place. Customers should ask for this before entering into any transaction. If the store says they do not have one, ask about the other regulations that may apply when borrowing money.
Or if this information around the license or state regulations is not readily available, it is always a good idea to look for other forms of financing. The fact is that using a pawn shop does come with risks, and there are many other places to turn to for low income loans.
Also, the pawnbroker needs to give every borrower a ticket for a collateral loan. Every person should be sure they get one. If it is not readily available, then back out of the transaction as there may be some type of scam going on. The pawn ticket should note the interest rate, repayment terms and schedule, and the item that was pawned to them. This piece of paper is critical to documenting the transaction.
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