What Are Pawn Loans & How Do They Work?

Posted by admin on March 11, 2020

When you approach a pawnbroker, you can take one or two options. 

You can either leave something valuable as collateral for a small loan, i.e.: a piece of jewellery or expensive antique, or sell said item to the pawnbroker in exchange for cash. 

Today, we’re going to explore the first option. There are many misconceptions about pawn loans, so we thought it would be a good idea, if you were thinking of getting one, to explain what they are and how they work. 

Most importantly, we want to differentiate between a standard bank loan and a pawn loan as there are a significant number of differences. 

The Process of a Pawn Loan
So, what does a pawn loan actually entail? As we said, it is the process of handing over a precious item (collateral) in exchange for money which you are expected to pay back. 

The loan is usually a small one, typically no bigger than £5,000, but for many using a pawn loan, this is enough for them to use for their purposes. 

The entire pawn loan process typically occurs as follows:

  • You have over the collateral item (also known as the pawn or pledge) over to the pawnbroker who will value it for you. 

  • If you are a new customer, the pawnbroker will then give you a ‘Pre-contract Credit Information Form’ but we believe it’s always best to ask for this even if you’ve asked for a loan in the last three years. 

  • You’ll be handed over a credit agreement which you’ll have to sigh. Be sure to read carefully and ask any questions you if there’s anything you might not understand. 

  • The agreement will involve how long it will take for you to pay back the loan and how much it will cost each month. The minimum is usually six months, but you can agree to a shorter or longer period if you so wish. 

  • Redeem the pawn at any time by paying the rest of what you owe and obtaining the item back. If you fail to pay the loan back, the pawnbroker is within rights to sell the item to recover the money they lost. 

  • Unless it’s part of the credit agreement, the pawnbroker will give you a separate pawn receipt which you’ll need to keep to prove you own the item.

  • Make sure you keep the receipt so that you can prove that the item is yours. 

From then on, it is a monthly repayment up until your agreed payback date. Upon completion of your loan, you will get your item back. 

What You Can Pawn
The most typical item that people pawn tends to be a piece of jewellery. However, if you have any item of value, you can pawn that too! This can range from a pair of old earrings to the latest iPhone. 

So many items can be pawned that the best way to find out is to read up what you can’t pawn. We have a whole blog on this topic, but here is a summary of what such items might be:

  • Firearms

  • Fake jewellery

  • Blu rays

  • DVDs

  • Video games

Basically, anything that is too common can’t really be sold for a pawnbroking loan. A loaf of bread would be a better example. 

Pawn vs. Bank Loan 
So, what is the difference between getting a pawn loan versus getting a bank loan? The biggest difference is the amount you get.

As already stated, you can only get up to £5,000 when it comes to a small pawn loan. With bank loans, the amount you receive tends to be a lot higher.

Because of this, the payback period tends to be shorter. While bank loans usually take a year or so to pay off, the pawn loan takes half that time. 

The other obvious difference is the collateral. At a bank, you won’t need to hand over an item for a loan but do need a good credit score in order to take one out. 

At a pawnbroker’s, you do exchange an item, but you do not need to have a perfect credit score, making it much more accessible and easier to obtain. 

The final difference is in the interest rate. Because of the shorter turnaround, the interest rates for pawn loans tend to be higher than bank loans. 

Comparatively, however, they aren’t all that bad considering payday loans which tend to be a lot higher than both. 

Get Your Pawn Loan at Cuttings
Are you looking for a pawn loan? Apply for one today at Cuttings! Be sure to visit our Cost of Loan page first for a good idea of how much you’ll need.

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