What Is A Pawnshop Loan? (And Why They're So Risky)

Despite indicators and talking heads claiming the U.S. economy is strong, many Americans are financially struggling. From an increase in credit card delinquencies (the U.S. added $111 billion in credit card debt between the second quarter of 2023 and the second quarter of 2024, per the Federal Reserve Bank of New York) to inflation to ever-rising housing prices, it can be easy to feel priced out of your own life today. According to an August 2024 MarketWatch Guides survey, 66.2% of Americans feel like they're living paycheck to paycheck.

Precarious financial situations can be further exacerbated by things like emergency expenses or a sudden job loss. While it's important to build up an emergency fund for these kinds of situations, it's easy to see how so many Americans might have had to put their savings goals on hold following the pandemic. Twenty-seven percent of U.S. adults reported having no emergency savings as of May 2024, according to Bankrate.

Even more troubling is that as delinquencies rise across the country, and households are increasingly unable to pay their monthly expenses, more and more people could damage their credit scores. These declines could make it even more difficult for struggling families to qualify for necessary loans. Not to mention, high interest rates can make the prospect of taking out such as loan difficult to swallow for many. All of this has combined to leave many Americans with fewer options than ever for staying financially above water. It's no wonder then that many are turning to shadier options like pawnshop loans in order to get by.

Pawnshop loans can provide instant cash in exchange for physical collateral. Whether it's expensive jewelry, an antique, or some other high-value item, the terms of this type of loan involve you leaving your item with the pawnshop in exchange for a percentage of its assessed value (and this amount is usually given to you in cash that same day).

Generally, pawnshop loans have time-period agreements, meaning you agree to pay back the loan within a set period of time. If you fail to repay within the time limit, the pawnshop can effectively take ownership of and sell the item you've left with it in order to recoup the loss of the initial loan. Unlike other loan types, a pawnshop loan is known as a non-recourse loan, which means failure to repay the loan amount will not negatively impact your credit score. However, this also means that repaying the loan will not help you build or repair your credit either.

Pawnshop loans are considered safety-net loans with generally small amounts. In fact, according to the National Pawnbrokers Association, the national average for a pawnshop loan is just $150 with an average loan time of about 30 days. However, keep in mind that in addition to paying back the loan amount you borrowed, there will be interest and fees attached to the total. Since 85% of pawnshops are independently owned small businesses or regional chains, the terms offered for a pawnshop loan can vary widely between businesses (and could mean they aren't the right loan type for you).

With a higher risk of losing your personal items (some shops require you to produce the physical pawn slip or ticket to return, which can be easily lost) and the potential for higher financing fees and interest rates, you might be wondering why some people choose to use pawnshop loans in the first place.

For starters, the lack of a required credit check can be an especially important consideration when looking for available loans. Those with poor credit, who might not be able to qualify for more official personal loans with financial institutions, generally have fewer options to choose from in cases of financial stress. This can make a pawnshop loan a more accessible option, and even a better option than something like a high-interest payday loan. (Take it from us, think twice before considering a payday loan.)

Similarly, those with bad credit don't have to worry about the potential of further damaging their credit should they ultimately be unable to pay back their pawnshop loan (plus, they won't have to worry about getting hounded by creditors and collections agencies). This is, of course, provided the person taking out the loan can live with the loss of whatever item they put up as collateral. Another big factor in why people might choose to pawn their items is the immediacy of the cash involved. Anyone with an urgent or immediate financial need can get cash from a pawnshop loan that same day, which can be an appealing option for many.