What are pawn shop loans?

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A pawn shop loan is a secured loan issued to a borrower based upon the estimated present value of an item presented as collateral. A pawn shop is a business that provides short-term loans to consumers, as well as buys items from consumers for resale to the general public.

The popular appeal of a pawn shop loan is that this type of consumer financing is typically issued without regard to credit history or evaluating the ability to repay the loan.

Types of pawn loans

In general, consumer loans issued to consumers can be secured or unsecured loans. An unsecured loan is a loan granted where no collateral is required in order to place the loan. The most common form of an unsecured credit is when a credit card is used to make a purchase.

A secured loan, on the other hand, is a loan granted against some sort of collateral, such as a lien placed on an asset the borrower owns or possession of the collateral asset itself. This collateral acts as protection for the lender, should the loan go into default.

A pawn shop can issue a loan on any personal item on which a value can be assigned. A potential borrower will present the pawn shop with an item for valuation, and the pawn shop will establish a value for that item. The pawn shop can then issue a loan based upon a percentage of the value.

Pawn shops typically lend up to 25 percent of the estimated value of the personal property being pawned. Loans above that amount are rare, because pawn shops need to factor in the cost of selling that property quickly if the borrower defaults on the loan. The pawn shop will keep the item in its possession until the pawn shop loan has been paid in full.

Common items used as collateral for a pawn shop loan include jewelry, watches, power tools and anything the pawn shop owner believes that the pawned item can be sold in the pawn shop. Most pawn shop loans are for 30 days, with loan extensions possible for those needing extra time to repay the loan.

Advantages of pawn shop loans

One of the main benefits of a pawn shop loan is the how little time it takes to execute the loan. A pawn shop loan can be made within a few minutes, with the borrower receiving the loan and leaving his pawned property with the pawn shop at the same time. A pawn shop loan doesn’t check a credit report which also means not repaying a pawn shop loan may not necessarily affect your credit score.

If you decide to obtain a pawn shop loan, make sure you completely understand the terms of your pawn shop loan – including the interest and fees you will accrue. You also need to understand how much time you will have to repay the loan, before the pawn shop takes full ownership of your property.

Pawn shop loans may offer convenience and quick cash, but pawn loans should be considered a temporary form of finance – and not a longer term solution to paying everyday bills.

Disclaimer: NetCredit is a direct personal loan provider and does not provide financial advice, nor does it vouch for any vendor or service mentioned on our NetCredit personal finance blog or online consumer loan glossary. Always research and perform due diligence on any service provider or vendor before deciding to use them, and we recommend that you speak with a financial advisor regarding all decisions that will affect your finances.

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