Once you get into the habit of using a pawn shop, it can be a hard job to kick the habit. Many people can see this, but have no other alternatives to help make ends meet – pawnshops are an easy way of accessing quick cash and, like most things, have both positive and negative aspects associated with them.

So how exactly do they work? It’s actually a pretty straightforward process. A pawnbroker lends a customer a small amount of money in return for some collateral (jewellery, electrical items, mobile phones etc). This collateral normally has a slightly higher resale value than the loan given and acts as a guarantee for the loan. The beauty of using objects as collateral is that no credit checks need to be done.

The pawnbroker will then give the customer a pawn tickets with the customer’s name and address, a description of the pawned item, the loan amount, and the maturity date of the loan. Often, the maturity of the loan will be 30 days later, however many pawnshops allow people to renew their loans. Customers are able to get their pawned items back when they fully pay off the loan with interest. If the customer defaults on the loan, the pawnbroker will sell the item on and cancel out the debt.

Advantages of Pawnshop Loans

- No credit checks are needed so anyone can use them, no matter how poor their credit rating is. As long as you have some form of collateral, you will probably be given a loan.

- It’s a quick process – there are no long forms to fill in and you will receive your money on the same day. This is handy if you need money quickly.

- If you don’t make any payments, it won’t affect your credit score. There are no worries about paying the loan – if you can’t afford it, no bailiffs will come knocking and no credit collection agencies will hassle you. If you fail to make your payment, the only thing that will happen is that you will lose the item you used as collateral.

- The loan amount can be negotiated. Obviously, the pawnbroker needs to cover their own costs therefore will try and loan out as little money as possible. However, the amount they loan you can often be negotiated slightly, particularly if the item you are pawning has good resell value.

The Disadvantages of Pawnshop Loans

- Appraisals are typically quite low so you won’t receive a loan for the full value of the item. This is because if you default on the loan, the pawnbroker has to make some profit when they sell on the pawned item, therefore they will offer you under what the second-hand value of the item is.

- Interest rates tend to be very high – some APRs can be as high as 120 – 300 percent. Partly, this high APR is because the loans are meant to be short-term, however it does mean that you might end up paying a lot of interest on a loan if you want to reclaim your item. In extreme cases, if you take a long time to pay the loan back, you might end up paying something like £400 to reclaim £100 worth of collateral.