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Conquering Your Collateral: Payday Loans VS Pawnshop Loans

Written By emilie dane on Monday, March 11, 2013 | 5:52 AM


Pawn shop Loans and payday loans can be a good alternative loan source for the individual looking for quick cash. While the idea of obtaining cold, hard cash on the spot can be an enticing one, it is important to look at the pros and cons of these particular types.

The pros of pawn shop loans have a lot to do with whether or not the borrower is willing to part with the collateral involved. The most important factor of these loans is the requirement of collateral. This is the main difference between them and payday loans, which do not require collateral. In fact, essentially all that is required for payday loans is collateral. Collateral can entail anything of value or interest to the pawn shop, from jewelry to guitars to an array of electrical appliances.

Another pro of pawn shop loans deals with credit scores, or the lack thereof. An individual's credit score will not be affected whatsoever when taking out a pawn shop loan. Since the borrower is using collateral, the pawn shop has the benefit of the appraised valuable and can keep it in the case that the loan is not paid back by the borrower. No follow ups, phone calls, or damaged credit results in such a case. As long as the individual is content in parting with their valuables, everything is settled at this point.

The third main pro of pawnshop loans is negotiations. Negotiations are usually welcome and sometimes even encouraged in pawn shops. If you are a smooth talking individual, you may be able to barter the price of the loan. This is especially true if the collateral you are working with is of particular value or is easy to resell to the general public.

The cons of pawnshop loans seem to highlight the pros of payday loans. Oftentimes an individual will go into the pawn shop loan with the idea that their collateral is all that they are putting at risk, when in fact it is not.

Pawnshop interest rates are high. Pawn shops lend with an APR of about 150 to 300 percent, depending on that particular state's laws. Some states allow for pawn shops to tack on additional charges such as storage fees and insurance. Some pawn shops even demand service fees with each new loan. For these reasons it can oftentimes result in a borrower paying $5,000 to gain back their collateral which was appraised at about $1,000 originally.

Speaking of pawnshop appraisals, they are usually on the low end. Usually, a loan one would get from a pawnshop is typically about 25 to 50 percent of what a seller would expect to receive if he or she were to simply sell the item. One example of such appraisals would be if someone were to pawn a $7,000 diamond necklace, the resulting loan would likely be as low as $500. The statistics show that the loan become less and less valuable as the value moves down from jewelry to items such as electric appliances.

With payday loans, there is no risk of losing your personal property since no collateral is involved in the loan. Usually all that is required is verification of bank account, employer, and some personal information such as age. At this point the money is granted with no collateral or credit check.

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