8 Reasons to Avoid Pawn Shop Loans

a young asian man on his phone researching if pawn shop loans are worth it

Pawnshops have a long history and are often perceived as a quick way to get cash during financial emergencies. However, deciding whether to take a loan from a pawnshop is not straightforward. While these loans can provide immediate cash without the need for stringent credit checks, they also come with their own set of risks.

Key Takeaways

  • Pawn shop loans are among the most expensive sources of funds.
  • To receive a pawn shop loan, you leave your valuables with the broker and borrow against the assessed value of the collateral.
  • According to the National Pawnbrokers Association, the average pawn shop loan is $150—a relatively low amount.

How Do Pawn Shop Loans Work?

A pawn shop loan is a quick way to borrow money without a credit check. Instead of using your credit, pawn shop loans use your personal property as collateral, such as:

  • Jewelry,
  • Firearms,
  • Electronics,
  • Musical instruments,
  • And more

A broker assesses the value of your personal property and issues you a loan based on a percentage of the value. Many pawn shops will only lend 25% to 60% of the collateral's resale value. Then, you must return within an agreed-upon time, typically 30 days, to pay the loan (interest and fees) and retrieve your belongings. Essentially, you are pawning high-value items for low-value loans. Here are eight reasons we suggest avoiding pawn shop loans.

1. High-Interest Rates

Among your lending options, pawn shop loans rank near the most expensive. Even though you borrow funds from a pawn shop for 30 to 60 days, the costs in this short range can be exorbitant. The interest rates on a pawn shop loan typically range between 20% and 25% monthly. This means your annual percentage rate (APR) can be over 200%, depending on where you live. For context, the APR for credit cards in September 2023 was 24.46%—the highest since LendingTree started tracking interest rates monthly in 2019.

Some state laws restrict the amount of interest pawn shops can charge. In addition to the interest rate, you may pay storage costs and insurance fees.

2. Risk of Losing Valuables

When you receive a pawn shop loan, you will leave your property with the broker until you repay the loan and all fees. Essentially, the property left at the pawn shop becomes the broker's. If you default on your payments, the pawnbroker can legally sell the collateral.

3. Short Repayment Terms

While personal loans can have a repayment term of several months to years, pawn shop loans have a much shorter repayment period. The standard pawn shop loan duration is around 30 days. However, some brokers extend loans in increments of 30 days as long as the interest and fees are kept current.

4. Limited Amounts

Most pawn brokers will only loan 25% to 60% of the item's resale value. This means if you have a flat-screen TV worth $500, a pawnbroker may only loan you between $125 and $300. If you need more, you may have to get another pawn shop loan by producing more collateral. In either case, the National Pawnbrokers Association reports the average pawn shop loan is $150—a relatively low amount.

5. Lack of Credit Building

Pawn shop loans do not require a credit check, which can be appealing if you have bad credit. However, it can also be a negative because the broker will not report your on-time payments to bureaus. As a result, you will not receive a positive credit reference for fulfilling your obligation.

6. Security Concerns

Even though many states have bolstered the regulation of pawn shops, not all brokers adhere to the state and federal laws. Over recent years, there have been many reports of nefarious activities, including:

  • Pawn brokers charging rates over what's allowed,
  • Tricking customers about the actual cost of their loan, and
  • Asking customers to sign illegal contracts.

7. The Pawn Shop Loan Trap

No matter the type of debt, it's vital to use it responsibly and understand the implications of the debt. Pawn shop brokers offer an option called a loan extension or renewal, where you pay the interest and fees to extend the loan. In the process, you get another 30 days to pay the original loan and accumulated fees. Some borrowers get into a cycle of extending their loan for several months, eventually paying double or more than the original loan amount.

8. Availability for Other Loans

Arguably, the biggest reason to avoid pawn shop loans is that there are many other less expensive and more flexible options. Here are a few:

Personal Loans

Unlike pawn shop loans entirely based on the value of the collateral, personal loans are types of unsecured installment loans issued based on your credit score and financial profile. A personal loan is when you borrow a predetermined sum, such as $1000. Upon approval, you'll receive the entire sum at once. Afterward, you will repay the personal loan, interest, and fees based on a fixed monthly payment schedule over a set period. You can use the personal loan for debt consolidation, emergency medical bills, or any other situation that may arise. Even if you have bad credit, some lenders specialize in administering bad credit loans.

Personal Line of Credit

A line of credit refers to a specific amount of money, such as $2,000, that a lender makes available to you. With a line of credit, you can spend up to the credit limit. Also called a revolving line of credit, you can pay down the balance and continue utilizing the funds. Credit cards are the most popular type of line of credit.

Peer-to-Peer Lending

As a relatively new solution, peer-to-peer (P2P) lending brings investors—both companies and individuals—directly to those who need to borrow money. Instead of going through the bank or a traditional lending source, P2P lending revolves around borrowing money from companies or people who are willing to assume the risk and lend it to you. P2P lending typically takes place online through a specialized platform.

Payday Loans

Payday loans are short-term loans that you repay on your next payday. While payday loans are technically unsecured loans, most lenders require you to provide either a post-dated personal check or electronic access to your checking account. The check or electronic access ensures the lender can recover the loan proceeds on the agreed-upon payday.

Bottom line: Find More Affordable Lending Options Through Integra Credit

Unfortunately, financial emergencies can always seem to happen at the worst time. Because of this, it's vital to have emergency savings available to cover the shortage. But if you don't have emergency savings, a pawn shop loan may seem like an easy and fast source of cash

Instead, a better option may be to use a personal loan or line of credit to create the financial cushion you need.


  1. Are Pawn Shop Loans Safe? | Rocket Loans
  2. How Do Pawn Shop Loans Work? A Complete Guide
  3. Pawn Loans: The Pros and Cons | Credit Karma
  4. What Is a Pawnshop Loan? - Experian
  5. Pawn Shop Loans: 5 Reasons to Avoid Them - OppU
  6. What Is a Pawn Shop Loan

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