Pawnshop loans, also known as pawn loans, are a type of secured loan where you use an item of value as collateral to borrow money. Here’s how pawnshop loans work. You bring an item, such as jewelry, musical instruments or power tools, to a pawnshop. The pawn broker will assess the value of the item and offer you a loan based on a percentage of that value.

Features

• No Credit Checks. Unlike a traditional loan or personal loan, a pawn loan doesn’t require a credit check. That means your credit score and credit history won’t be affected by taking out a pawnshop loan. This is great for those who have bad credit or no credit at all.

• Quick Cash. Pawnshop loans are cash fast. When you bring an item of value to a pawnshop, you get cash on the spot. This quick cash feature makes pawn loans perfect for emergency situations where you need money faster than traditional methods.

• Collateral-Based Lending. A pawn loan is collateral based. You provide a high value item, such as jewelry, musical instruments or other valuables, to the pawnshop. The pawn broker will assess the value of the item and offer you a principal loan amount based on that value. If you can’t pay off the loan, the pawnshop keeps the pawned item.

• No Impact on Credit Scores. Defaulting on a pawnshop loan doesn’t involve debt collectors or affect your credit score. Since there are no credit bureaus involved in pawnshop loans, your financial situation isn’t reported, so it’s a safe option for those who want to avoid negative marks on their credit report.

Pros and Cons

Pros

1. Quick Cash. Pawnshop loans are a fast way to get a loan. When you bring high value items to a pawnshop, you get cash on the spot without the lengthy approval process of traditional loans or credit union loans.

2. No Credit Checks. Unlike traditional loans, pawnshop loans don’t require credit checks. This is a great option for those with bad credit or can’t pre-qualify for other types of loans. Since no credit bureaus are involved, your credit score won’t be affected.

3. Flexible Loan Terms. The loan term for a pawnshop loan is short, usually a few months. If you can pay off the loan within the grace period, you can get your pawned item back. The National Pawnbrokers Association says pawnshop loans work by providing flexibility in repayment without affecting your credit scores.

Cons

1. High Interest Rates and Fees. Pawnshop loans come with high interest rates and additional fees such as insurance and storage charges. These interest and fees add up, making the overall cost of borrowing money through pawnshop loans more expensive than other loan options.

2. Risk of Losing Collateral. If you can’t pay off the loan within the agreed loan term, the pawnshop keeps your pawned item. This is a big risk especially if the item has sentimental value or if its resale value is much higher than the average pawnshop loan amount you received.

3. Limited Loan Amount. The average amount you can get from a pawnshop loan is lower than other loan types like car title loans or personal loans from credit unions. The amount is based on a percentage of the item’s resale value, which might not be enough if you need to borrow more money for bigger financial needs.

How to Apply for a Pawnshop Loan?

1. Choose A Pawnshop. Select a reputable pawnshop, whether online or physical, that complies with state laws and federal regulations.

2. Prepare Required Documents. Gather necessary documents such as a pay stub, social security number, bank account information and proof of income.

3. Fill Out The Application. Fill out the pawnshop loan application form with personal details, employment information and loan amount. Submit the application online or in person.

4. Review The Loan Agreement. Review the loan agreement carefully, pay attention to interest rates, fees, repayment terms and due date.

5. Get Loan Proceeds. Once approved, get the loan proceeds directly to your bank account or prepaid card account, usually on the same business day.

Requirements

According to the U.S. government’s Consumer Financial Protection Bureau (CFPB), to qualify for a loan, most payday lenders only require that borrowers:

1. Age. Applicants must be at least the age of majority, which is 18 in most states, although some states require borrowers to be 19 or 21 years old.

2. Active Checking Account. A valid and active bank account is required for the deposit of loan proceeds and for the lender to withdraw repayments.

3. Proof Of Income. Borrowers need to show proof of regular income, such as pay stubs, to show they can repay the loan.

4. Valid ID. Borrowers must present valid ID, which is usually a social security number, to verify their identity.

Ways to Get the Money

1. Direct Deposit. The most common way is direct deposit into your bank account. Once your payday loan application is approved, the payday lender will deposit the loan proceeds directly into your active checking account, usually on the same business day.

2. Prepaid Debit Card. Some payday lenders offer to load the borrowed amount onto a prepaid card account. This is good for those who don’t want to use their bank account.

3. Cash. In some cases, especially with in-person payday lenders, you can get the borrowed amount in cash. But this is less common than direct deposit or prepaid card options.

4. Check. A few payday lenders may give you a check for the loan amount which you can then cash or deposit into your bank account.

Payday Loan Rates

Payday loan rates usually have fees from $10 to $30 per $100 borrowed depending on the state and loan limits. A typical fee is $15 per $100 borrowed which translates to an annual percentage rate (APR) of around 400% for a 2 week loan. For example, if you borrow $300, you would need to pay around $345 by next payday. These rates are much higher than other types of loans such as personal loans or secured personal loans.

Payday lending is allowed in 37 states, 11 states including Connecticut, Maryland and New York have strict regulations or rate caps that limit or prohibit payday lending. Some states like Arkansas and North Carolina have repealed their payday lending laws and others like the District of Columbia have banned it altogether.

18 states and the District of Columbia have usury rate caps, often at 36% APR, to curb high-cost payday lending. States like Nebraska, Hawaii, Illinois and New Mexico have recently passed such caps, which is a growing trend to regulate payday loan rates.

The highest payday loan rates are in states like Texas (662%), Missouri (652%) and Delaware (639%). On the other hand, states like Oregon (140%), Maine (228%) and Iowa (247%) have lower rates. Some states like Washington and Virginia have additional regulations to limit the number of payday loans or extend repayment terms to prevent debt traps.

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