How Do Pawn Shops Work?

You need quick cash. You’re looking for a loan and considering a couple of options. You take a drive and see something you might not have noticed before — a pawn shop.

But how does a pawn shop loan work?

Pawn shops offer short-term, collateralized loans. They’re one way of getting money fast, but they can come with risks. Here’s what you need to know before considering a loan from a pawn shop.

How do pawn shops work?

Pawn shops provide short-term loans. As security for the loan, pawn shops hold on to a valuable item of yours until you repay. Once the loan is repaid, you get the item back. A pawn shop loan is also referred to as a pawn loan or collateral loan.

Using a pawn shop for a small loan can be one option to consider if you have a valuable item and need cash quickly. Instead of selling your item on a website such as eBay, you’re able to use the item for funds and keep it in the end.

Here’s how pawn shop loans work:

  1. The pawnbroker evaluates an item brought in by the borrower and determines its value. The loan amount is then agreed upon verbally.
  2. The borrower provides a valid form of identification, which can include a driver’s license, passport or ID card.
  3. A loan contract created by the pawnbroker, which the borrower reviews and signs. The borrower is given a copy or receipt for reference, which is also called a pawn ticket.
  4. The item is exchanged for the cash loan. The pawn shop keeps the item locked away in a safe.
  5. The borrower repays the loan according to the term agreements. Then, they collect their item.

Although your item will be in the pawn shop’s hands, it’s still legally yours. However, if you default on the loan, the pawn shop becomes the owner of your item and can sell it to the public.

What are the interest rates for loans from pawn shops?

The interest rates for pawn shop loans are generally high, typically ranging from 20% to 25% per month. This can lead to APRs upwards of 200%. There can also be insurance and storage fees.

In general, pawn shop loans need to be repaid in full, including interest and fees, within a month or so. The combination of high interest rates and short repayment terms can make these loans difficult for some borrowers to pay off and get out of debt. In addition, unlike unsecured loans, pawn shop loans carry the risk of a borrower losing the property they pledge as collateral. If the item possesses sentimental value in addition to monetary value, this could be an additional blow.

Although pawn shops can provide fast cash, there are other quick, easy loans available. Some of these may have lower interest rates, and some — like installment loans — spread repayment over time to reduce the cost of individual payments.

How much money can you get from a pawn shop loan?

The amount of money you can get from a pawn shop loan is based on the item’s resale value, also called an open market valuation (OMV). This amount is typically much lower than the item’s inherent value, so your loan will only be a percentage of the item’s worth.

The loan amount you receive can be as little as 25% of the item’s original value. For reference, the average pawn loan in the U.S. is $150, according to the National Pawnbrokers Association (NPA).

How do pawn shops work in different states?

Each state has its own laws regarding pawn shops and pawn loans. The NPA’s website includes a resource that breaks down pawn shop laws by state.

Pawn shops are regulated federally as well. The federal laws U.S. pawn shops operate under include The Patriot Act, Equal Credit Opportunity Act, and the Truth in Lending Act. In addition, pawn shops work with local law enforcement to prevent stolen items from being pawned.

However, some states have lax interest regulations, and there have been instances of pawnbrokers taking advantage of these loopholes.

Do pawn shop loans require a credit check?

No, pawn shop loans generally do not require a credit check. Pawn shops do not need to know your credit history because they already have loan security in the form of your item. If you can’t repay your loan, they will simply take possession of the item.

Pawn shops generally will not report you to credit bureaus, and pawn loans do not affect your credit score. This can make pawn loans attractive to those with low credit scores. However, it’s important to note that borrowers with low credit are not limited to pawn loans. There are other ways to get loans with no credit check.

What else do pawn shops do?

In addition to receiving a cash loan, you can also sell and buy goods from pawn shops. Some pawn shops also offer appraisal and repair services.

Selling items at pawn shops. If you have a valuable item you want to sell, a pawn shop might be a good option. This way, you won’t need to deal with the hassle that accompanies selling high-end goods, such as auctions, authentication or shipping.

Items typically accepted by pawn shops include:

  • Watches.
  • Collectibles.
  • Diamonds.
  • Musical instruments.
  • Jewelry (such as necklaces, rings and bracelets).
  • Sporting goods.
  • Precious metals (such as gold and silver).
  • Video game consoles.
  • Cameras.
  • Laptops and computers.
  • Luxury handbags.

Buying items at pawn shops. You can also buy valuable items from pawn shops. Don’t worry — you’ll never buy an item that’s currently someone else’s loan collateral. If it’s out on the sales floor, it’s property of the pawn shop and available for you to purchase.

Back to Top