If you’re looking for loan alternatives, chances are you’ve heard the word “pawn” come up a few times. It’s easy enough to picture shops full of old guitars, appliances, and jewelry that no one ever came back for, but there’s actually a lot of potential in pawning; you’re not just limited to grandpa’s old watch. So then what is a pawn loan, really? Well, let’s find out.
What Is A Pawn Loan – Pawning 101
By definition, to pawn is to use something (or someone) to further the purposes of another. Pawn loans take that and make it a financial form by allowing lenders to use personal property as collateral for their loan.
Simply put, a pawn loan is any loan where the borrower pledges property as collateral for the money they’re receiving from a lender. When you think of it that way, pawn loans encompass a lot more than just the goods in pawn shops.
Any loan where you use your house as collateral, for example, could be considered a pawn loan, as could something like an auto title loan. So an easy rule of thumb when asking “what is a pawn loan “ is to simply ask whether or not you’re using a piece of personal property as collateral.
If the answer is “yes,” it’s a type of pawn loan.
Can I Keep It?
If you’re working with the notion that pawn loans are just what you see in pawn shops, you might be a little nervous about having to give up the goods to get the cash. That may not be the way your loan works, though, and even then, you might be surprised at how much flexibility you have with a traditional pawn.
When you’re thinking about “what is a pawn loan,” it’s important to remember that the value of the loan comes from the value of the thing you’re using as collateral. In order for the loan to be secured, the lender needs to hold onto the thing that has value during the life of the loan.
For smaller items, that means that the lender may hold onto the actual piece. Think things that are easily transported and that won’t require a lot of maintenance or too much space to store – those typical pawn goods like jewelry, small appliances, bicycles, memorabilia, instruments, etc.
The size of the item doesn’t have to stop you from looking for a pawn loan with it, though. In fact, larger times can mean larger loans, and that’s something that’s attractive to both lenders and borrowers.
So what is a pawn loan that doesn’t require you to give up the goods? Anything that has ownership papers can be pawned without the item being touched. Things that fall into this category include:
When you’re using your home’s value as collateral, for example, your lender isn’t going to make you vacate the home. Instead, you’ll use your deed other ownership papers as collateral. The lender will hang onto those temporarily, and you’ll continue your home life without interruptions.
You can do the same thing with the titles for motorized vehicles, too. Car and boat title loans will leave you with a completely usable vehicle and get you some cash in the process.
What Is A Pawn Loan Going To Get For You?
If you’re considering a pawn loan, you’re probably wondering what the advantage is for you to borrow using your own, personal items as collateral. That’s a fair question, and one anyone wondering what is a pawn loan should also be asking.
There are a lot of advantages to a pawn loan, but they come with their own conditions and limitations, just as any loan would. The big limit that you’re going to see is that pawn loans are short term loans, which simply means that borrowers have less time to pay back than they would something like a personal loan from a bank.
The value of a pawn loan isn’t generally what a borrower would get from a bank’s personal loan, though, so it’s not usually a problem. In fact, depending on the value of the collateral used, a pawn loan could have a repayment period of months or even years.
In return you get some advantages that are specific to secured, short term loans, including:
- A loan without a credit check
- Really quick cash
- Lower interest paid
- Flexibility with terms
Since pawn loans are secured by the value of the collateral that you’re putting into them, your lenders aren’t going to be concerned with your financial history. As long as they have the collateral, there are very few pawn loans that will also require a credit check for approval. That means that things like bad credit and even bankruptcies don’t have to impact your pawn loan approval.
Another advantage to the pawn loan is that, because you can turn over your collateral right away, you can get money just as fast. You won’t have to wait on a lot of processing. Instead, you’ll be able to get your money usually in a day’s time or less, and depending upon the collateral, you may even be able to get it on the spot.
As a short term loan, pawn loans can have higher interest rates by the percent of interest charged than other loans. The repayment period on a pawn loan doesn’t last nearly as long as that of other types of personal loans, though. They’re short-term, remember?
That means that while the percentage number might be higher, the dollar amount of interest paid will be a lot lower than that of a long-term personal loan. Pawn loans can actually help save you some money this way, as long as you’re careful about the affiliated fees, too.
As for your terms, because your collateral for a pawn loan is unique, your loan is going to be unique, too. You’ll be working directly with your lender to create a loan that fits the collateral, which gives you the chance to help shape your loan.
You’ll be able to discuss what terms work best for you, and you’ll have more of a say in what your specific loan is. It’s a case when the answer to “what is a pawn loan” is “it is what you make it.”
The Right Kinds of Pawn Loans
Just like any other industry, there are good and not-so-good players in the pawning game. So along with asking “what is a pawn loan?” it’s important to ask “what kind of pawn loan is it?”
There are a few things to keep in mind when it comes to looking for the right kind of pawn loan. Specifically, you want to consider things like:
- The value of your item
- Associated fees
- Interest rates
- How long you get to repay
- Whether or not a company is specialized
- What you can get in writing
Ask yourself “what is a pawn loan from this company really getting me?” Know the relative value of your item going in, and make sure your lender knows, too.
This is a simple, straightforward way to figure out what kind of lender you’re working with. The value of a pawn loan is based on the value of the item you’re using as collateral, usually at a markdown to the borrower. While shopping around is a smart idea, loans that are at or greater than the cost of the item in question are usually an easy way to get borrowers on the line for more money than they can reasonably afford.
This leaves you out whatever you do manage to pay, and without a means of retrieving your item. Instead, look for a lender who understands the value of your item, and who is transparent in what they can lend and why their number is what it is.
Pawn loans are short-term loans, which means they often come with fees attached since lenders aren’t going to see much return in interest. Fees, themselves, don’t need to alarm you, but a lot of them should. Likewise, fees that aren’t disclosed until after you apply or fees that outweigh the value of your loan are red-flags.
Like with fees, interest rates on pawn loans are usually a bit higher by sheer percentage than you would see with other loans due to shorter payment periods. Since the payment periods are shorter, the interest in dollars should still be less than that of a long term loan. Just keep an eye out the fees and interest rates together aren’t exceeding what you’ll be able to afford. You should be able to get the numbers for these upfront.
Repayment periods are going to vary depending upon a lot of things, including the value of your item and the terms of your loan. Just remember that you’ve already provided collateral for your loan. An upfront fee or payment might be necessary, but demanding the whole value of the loan upfront and postdated, too, isn’t necessary, and isn’t in the best interest of the borrower.
Working with a company specialized in your type of loan is an easy way to help you get the right type of lender. They’re going to know things like your time’s value inside and out, and they’ve invested in building a name for themselves in an industry. If you’re looking to pawn your car, try to find a specialty auto title loan lender. Same for house, jewelry, appliances, bikes, instruments, or anything else.
Everything regarding the item, the terms of the loan, the repayment plan, and any other pertinent details should be put down in writing. Word of mouth means nothing when it comes to protection of the borrower. Everything should be in writing – period.
What Are the Risks
Of course, no financial opportunity comes without risks. When researching “what is a pawn loan”, you also have to keep in mind what a pawn loan isn’t. It’s not a donation, it’s not sale, and lenders are neither a charity nor your consumer.
The security you put in place is security for your lender first and foremost. It’s a means for them to recoup any losses for a borrower defaulting on a loan. That means that if (and only if) you can’t manage to make payments on your loan, your lender could claim the collateral as their own – house, car, prized baseball card, whatever it may be.
It’s rare that a loan comes to this. Most borrowers are more invested in their loan, and most lenders understand that it’s in their best interest to have the loan work out rather than claiming the good. A lender would often rather work with a borrower to create a more affordable payment plan or generate a settlement that is in the interest of both parties.
If your circumstances ever change in such a way that they impact your ability to repay, like losing your job for example, the best thing to do is call your lender. They want their money back just as bad as you want your collateral back.
They’ll work with you on what can be done to salvage your loan, and the earlier you can get to them, the better. Try to avoid waiting until your loan goes into default. Instead, get in touch with your lender as soon as you think there might be a problem and let them know.
Ask what is a pawn loan option for people in your circumstance. They’ll likely be willing to work with you to help figure one out.
All that being said, there’s a lot you can do with a pawn loan, and almost no limit to how you can secure one. Consider options like a car title loan for when you need a bigger loan, and smaller pawns for when you might not need as much, but when need a little something a lot faster.
A pawn loan can be a great way to get the cash you need, and know that you know “what is a pawn loan,” you’re all set to go out and take one on for yourself.