If you’re comparing payday loans vs pawn shops, you’re probably evaluating short term loans. Pawn shops and payday loans are fast ways to get a small loan when you’re facing a challenging financial situation.
Understand that neither payday lenders or pawn shops are ideal sources for a short term loan:
• A pawn shop takes the collateral offered, such as fine jewelry, and makes a loan usually priced at 30 to 300 percent APR. There’s no credit check involved.
• A payday lender makes a short term loan to an employed person. The lender assumes that the borrower can repay the loan between pay periods. A payday lender charges approximately 25 percent to loan a small sum over a two week to one month period.
• The interest charge can look reasonable until you realize it’s charged over the loan term. According to Pew Charitable Trusts, the average APR charged for payday loans is almost 400 percent.
• There’s no credit check involved.
PayDay Loans vs Pawn Shops
a convenient, no collateral short term loan.
Pros: A payday lender doesn’t require the borrower to provide collateral, or security, for the loan.
• You must provide the lender with proof of employment, a bank account, and valid government-issued identification in most cases.
• You don’t need good credit to arrange a fast loan.
• The payday loan transaction can be executed at a local payday loan store or through an online service.
• Payday lenders are available in 36 states.
Cons: A payday loan is expensive:
• If you can’t repay the payday lender on time, interest and other fees will quickly increase the size of the debt.
• According to Pew Charitable Trusts, the average borrower pays more than $500 to borrow less than $400 from a payday lender.
• Failure to repay the lender as agreed can result in 1) bank overdraft charges, 2) collection calls, 3) damage to your credit report, 4) legal woes, and 5) paycheck garnishment. The original amount you borrowed from the lender won’t matter. The lender will pursue you if the money isn’t repaid with interest as agreed.
Pawn Shop Loans:
a fast way to borrow money on your collateral with no credit check.
Pros: It’s possible to borrow a higher sum from the pawn shop if you have high-value collateral, such as expensive fine jewelry, antiques, coins, gold bullion, land, or other property.
• If you can repay the pawn shop loan under the lender’s terms and conditions, the lender returns your property.
• It’s possible to get a loan on your asset without liquidating it. This could trigger capital gains.
Cons: Most pawn shop lenders want to loan money to people with high-value collateral. However, realize that the lender will lend only a fraction of the collateral’s market value.
• You own a two-carat diamond ring in a platinum mounting that’s appraised at $30,000. The lender may offer just 10 percent of the item’s value. If you forfeit on the loan, the lender wants the option to sell the item quickly at a profit.
• The pawn shop is likely to also charge storage, handling, or ticket fees.
• Many pawn shop lenders make 30-day loans. The loan may be renewed several times before the lender releases it. If you don’t repay the loan in full, the item is forfeited. In that case, the lender purchased an item worth $30,000 for a fraction of its replacement value.
Realize that these fast cash solutions involve high costs and some risk. Some states actually classify payday lenders under racketeering laws. New Jersey and New York classify these loans under criminal usury statutes.
If you’d rather not provide collateral for a short term loan, consider asking friends and family to make a short term loan. Protect your relationship with the lender by repaying the debt in full at the agreed-upon date.
Other Short Term Loans
If the borrower has a credit card in hand, he or she could also get a credit card cash advance. It’s possible to obtain the cash advance at a bank, at an ATM, or through an internet banking service. Taking a credit card cash advance will accelerate how much interest the borrower pays. However, the decision to take a credit card cash advance may be less expensive than some other short term loans.
Like other sources of short term funds, the borrower should plan to repay the credit card cash advance as soon as possible. The average cost of funds is 10 to 30 percent APR, depending on the credit card issuer’s terms and conditions.
A peer-to-peer (P2P) lender may provide an alternative borrowing option. Although most P2P lenders want to lend at least $1,000 over longer loan maturities, it’s possible to get an APR quote that won’t damage your credit score.
If this is really a financial emergency and you’ve contributed to a 401(k) or another qualified retirement account, you may have the option to loan yourself money. Contact your plan sponsor or HR department to learn more.
In conclusion, the comparison of payday loans vs pawn shops doesn’t yield an ideal choice. Many borrowers have problems repaying these loans. They sometimes experience greater stress because they chose to do business with a payday or pawn shop establishment.
If you need fast cash and have no other alternative, don’t borrow more than you can afford to repay.
In the future, 1) repair your credit, 2) get a credit card for emergencies, 3) open a bank or credit union savings account for a rainy day, and 4) invest in liquid assets to use when necessary.