The recent wave of reality TV shows has created a perception that pawn shops are really great places to buy and sell unique and/or rare items. However, that perception is a bit skewed and has taken the focus off of what pawn stores were originally intended for. That is, to provide loan options to those who may not otherwise qualify for a traditional bank loan.
A pawn loan is a temporary loan between the pawn shop and the borrower. The loan uses items in possession of the borrower as collateral for the loan. The pawn shop retains ownership and possession of the item until the lender can pay the loan back. If the lender is not able to pay the loan back within in the set time frame (most states give you at least 30 days), the permanent ownership of the item remains with the shop.
Contrary to what some may believe, pawn loans are safe loans for borrowers. Until the loan is paid back, it is the responsibility of the pawn store to keep the item held for collateral safe and stored properly. Also, most facets of pawn loans are regulated by the states including the interest rates. In fact, interest rates attached to pawn loans are typically much more affordable than rates attached to payday or cash advances. Again, rates are regulated state-by-state so in some areas this may not hold true.
Perhaps the most distinguishable difference between a pawn loan and a traditional loan is that defaulting on a pawn loan does not impact your credit score in anyway. Pawn loans are considered “no recourse” loans. So if the borrower forfeits the loan, they simply lose their pawned item and do not have to worry about the pawn shop suing them for payment or reporting them to the credit bureaus. In addition, if regular interest payments are made on the loan, one can typically extend the loan as needed until able to pay back the principal in full, offering more flexibility than other traditional loans.
In short, pawn loans are safe and easy loans to complete. They offer an option for quick cash to those who may not qualify elsewhere or who prefer to avoid the high interest rates of cash advances. However, unless you’re certain you can make regular interest payments or pay the principal within the set amount of days, don’t put something up as collateral that you can’t bear to lose.