How Does a Pawnshop Loan Work?

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Pawnshops can serve a valuable role in providing short-term loans to customers with something valuable to serve as collateral. In contrast to a bank loan, there’s no credit check or investigation into your income. Instead, the amount you can borrow depends on the value of your collateral. The downside is that if you don't pay the loan back as agreed, you lose whatever you provided the pawnshop to secure the loan.

Securing the Loan

To borrow money from a pawnshop, you bring in something that can serve as collateral for the loan. Common examples are jewelry and electronics, but the item can be anything of value. You’ll be able to borrow an amount based on what that item is worth, its condition, and what the shop feels it can sell it for. This usually is a small percentage of the item’s value if you were to simply sell it. The pawnshop retains the collateral and gives you the funds and a pawn ticket. This ticket has your loan number, a description of the item and the expiration date.

Repayment Process

Pawnshop loans vary by state and will be disclosed to you before you agree to the transaction. Commonly, however, pawnshop loans are for 30 days. At the end of the 30 days, you’re responsible for paying the loan back in full, plus interest charges. The interest varies according to state regulation, but 10 percent per month is common. If you can’t pay the loan, the shop will usually offer an extension, where you’ll pay a fee to acquire another 30 days to pay the loan back. If you can't pay the loan back, the pawn shop takes possession of the item you pawned.

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