A question that we get a lot in the pawn shop business is, “Are pawn loans the same as payday loans?” It’s easy to confuse them; payday and pawn loans are often unjustly seen as financial options of last resort, and there is little information out there to help borrowers make informed choices.
When you’re in a financial pinch and need money right away, it’s all too easy to go with whatever is convenient, close at hand, or first comes to your attention. It's vital to understand the differences between pawn shop loans and payday loans to avoid falling further into trouble. We want our customers to be as informed as possible when they are in need of some quick funds.
Keep reading to find out some significant differences between payday loans and pawn loans, and how to choose which is the right option for you.
Payday loans are high-interest loans given against a post-dated check that you provide to the loan company. The amount loaned and the time you get to pay it back depend on your income, as well as the frequency at which you are paid. Payday loan companies require extensive information from you, including recent pay stubs and, in some cases, bank statements.
Pawn loans are cash loans given against a portion of the value of an item that you pawn for collateral, usually things like electronics, bicycles, jewelry, or musical instruments. The amount you will receive depends on the value of the item, and the terms agreed upon with the pawn shop. You have a set amount of time to repay the loan; if you pay it in full, you get your item back. If you do not pay in full by the end of the repayment period, the shop keeps your article.
There are three significant differences between pawn loans and payday loans that you should take into careful consideration when choosing who to borrow from:
Impact on credit score
When your payday loan comes due, if you have insufficient funds to cover the check that you provided to the lenders, your loan is considered in default. You will also be subject to overdraft fees from your bank. If your debt is not paid off after a set period, your outstanding debt may be sold to a collection agency. The collection agency will then report the default to the three major credit reporting bureaus, which causes your credit score to plummet; a damaged credit rating can cause many other problems for you, including an increase in your auto insurance rate, and for some, increased difficulty in renting apartments.
Pawn loans have virtually no impact on your credit score, as you are not required to provide banking or credit info to get a pawn shop loan. If you default on the loan, the shop acquires the item you borrowed against and obtains the right to sell it.
Payday loans have incredibly high-interest rates from the get-go, usually around 400% APR. If you default on the loan or arrange for extensions, it’s easy to get caught in a cycle of paying only the interest payments month to month, while the principal remains untouched.
Pawn shops, on the other hand, are highly regulated as to how much interest and fees they can charge on their loans. Most borrowers will find that the fees and interest from pawn shops are far more favorable than those attached to payday loans.
Payday loans are rigid in the repayment period. Typically, repayment is due in full the next time you get paid. Extensions are possible, but not without additional fees and increased interest rates.
Pawn loans, meanwhile, are much more flexible regarding repayment. Loan periods may vary in length, sometimes up to four months. Pawn shops also have more freedom to work with borrowers to reach terms that are agreeable to both parties. Many factors influence every aspect of pawn shop loans, from the borrower’s history with the shop, to a responsible borrower’s proactivity in requesting more time to pay or for an adjustment in terms.
For lots of people who find themselves in a bind, a pawn shop loan is their best option – pawn loans take a matter of minutes, don’t require extensive personal information beyond a valid ID, and don’t ask you to put your hard-earned credit score at risk. What’s more, you don’t flirt with the financial disaster of getting trapped in an endless cycle of debt.
If you ever had negative connotations about pawn shops, it’s time to think again – pawn shops have proven themselves to be a helpful alternative to high-interest lenders. Pawn shops are also highly regulated by federal, state and local laws and regulations; most, like us, are run by honest people who want to help their communities.
We want to help you get the cash you need and to avoid a cycle of debt that might keep you from reaching your dreams. What’s more, we love to help those who might not have access to the kinds of financial resources that many others take for granted.
When you're in a bind, a pawn shop loan offers lots of advantages over a payday loan, but only if you choose the right pawn shop for your business. Choose a reputable shop like us – we're people, too, and are sympathetic when good people find themselves suddenly struggling financially.
When it comes down to it, pawn loans have minimal impact on your financial health and are far more flexible than payday loans. Pawn loans are set up to be helpful and constructive, and to give you the time and space you need. If you have an item of value, we are the clear, trustworthy choice for your loan. Come in today and let us show you how we can help.