Pawnbroker Loans - Pros and Cons
Borrowing Money with a Bad Credit Rating and Financial Difficulties
Feb 19, 2009
Pawnbrokers have been in operation for centuries, but are enjoying something of a resurgence in the current economic climate. According to the National Pawnbrokers Association (NPA), there are about 800 pawnbrokers in the UK and this number is set to grow at 10% per annum.
How Does a Pawnbroker Loan Work?
A pawnbroker loan works on the basis of lending money based upon the provision of collateral, such as jewellery. The majority of pawnbroker loans are for between £5 and £150 and are usually over a term of up to 6 months. Pawnbrokers will lend up to 50% of the collateral's valuation price. This conservative lending strategy is designed to cover both the high APR and resale in the event of loan default.
Advantages of Pawnbroker Loans
- Convenience. Provided that someone has sufficient collateral, they are guaranteed to get a no credit-check pawnbroker loan;
- No bad credit rating. Loan default won't result in a bad credit rating;
- Flexibility. All pawnbroker loans are highly flexible in terms of amount and duration. However, due to the high APR, the maximum term is usually 6 months;
- Cheaper than payday loans. As no credit-check loans go, a pawnbroker loan may constitute a less expensive alternative for dealing with financial difficulties to Payday loans.
Disadvantages of Pawnbroker Loans
- High APR. Whilst interest rates on no credit-check pawnbroker loans vary, most charge a high APR of 8% per month or £8 per £100 borrowed. The annualised rate of APR on pawnbroker loans is about 125%;
- Low appraisals. Pawnbrokers provide a low valuation of about 30-50% of the collaterals value. This is to cover both the high APR and sale in the event of loan default;
- Stolen goods. There is evidence to suggest that pawnbroker loans encourage theft;
- Loss of pawn-receipt. Loss of the pawn-receipt can mean that the collateral is sold;
- Loan default. Failing to keep up with repayments on a pawnbroker loan will lead to the collateral being sold. If it is sold for less than the debt, the borrower remains responsible for the difference.
If forced to choose between an instant no credit-check loan and a pawnbroker loan, the latter offers the more favourable rate of APR. No pawnbroker loan should be seen as a source of long term borrowing. They are only designed to help in the event of short-term financial difficulties.
Those that found this article useful may also be interested in reading about how to eliminate credit card debt and avoiding loan sharks. A comparison of secured loans and unsecured loans will help someone decide which is the better option.
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