Florida-based dentist Dr. Michael Hammond intended to finance his dental practice using a small business loan from a traditional bank. Given his strong credit and business plan, he assumed he’d have no issues.
But the bank wouldn't grant the loan he expected, so Dr. Hammond moved on to plan B: selling family jewelry to an online pawn shop for $40,000.
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Though the words "pawn shop" tend to evoke thoughts of "Cash 4 Gold," online pawn shops have taken the strongest part of the business model (fast cash in exchange for your stuff), and revamped it for a higher-end customer. With banks getting loan-shy post-recession, these virtual shops offered consumers another source of funding—which they could procure from their jewelry box or favorite curio drawer.
And many took advantage: According to research out of Vanderbilt University, about 8 million households in the United States have used pawn shops. That rate has risen steadily by about 3-4% per year, before ballooning to a 20% increase starting in 2007, when the recession began.
Could some of these newly revamped sites be a viable way to make extra cash—or are they too good to be true? Read on to find out whether pawning your stuff could be a good choice for you.
How It Works
Pawning, at its core, is a way to borrow money from somewhere other than a bank. When you need a little extra money but don't want to outright sell a valuable possession, you "trade" it for a short-term loan from a pawn shop. Once you and the shop agree to a value for your item and loan term, funds can be wired to your bank account in as little as 24 hours. Assuming you honor the terms of your loan and make monthly payments, you’ll get your item back.
One of the major appeals of securing a loan through a pawn shop is that it has no impact on your credit. In order to borrow money from a bank, the bank will check your credit, and if you're delinquent with payments, it will have a negative impact. If you default on a pawn loan, the shop simply keeps your item.
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Unlike traditional pawn shops, which tend to buy anything from stereos to vacuum cleaners and have an average pawn transaction value of $150, online pawn shops deal exclusively in higher-end goods like jewelry, collectibles, designer handbags and expensive electronics. Unlike “Cash 4 Gold” style outfits, online shops aren’t interested in broken gold chains or a late-model television.
Potential sellers send a digital image and description of the item they’re interested in selling or pawning to the site and receive an expert appraisal in a day or less, along with corresponding loan terms like interest rates, fees and loan duration.
Once an agreement is reached, customers ship the items for free—and receive cash in as little as 24 hours. Though the leading industry sites like iPawn, UltraPawn, Pawngo and borro vary in exactly which items they’ll accept, all fully insure items for the duration of the loan term.
Dr. Hammond says that the overall loan terms and experience iPawn offered were more competitive than what he found at several banks. “I found low interest rates, a better payment schedule and real customer service that doesn’t treat me like an account number,” he recalls.
What You Need to Know Before Pawning
First, be aware that not every pawn site is the same. There is variation both in the items accepted and the loan terms they'll offer.
Because the sites deal in higher-end items, there are minimum loan amounts. For example, Pawntique loans start at $100, UltraPawn at $250, Pawngo and iPawn loans begin at $500 and borro loans at $1,000. Items don’t have to be in mint condition, but having original packaging, papers and purchase receipts can boost negotiations, which is par for the pawning course. If you don’t know what your items are worth, do research on eBay or—in the case of jewelry and art—visit an appraiser to get a ballpark figure.
Just because the site will accept your items doesn't necessarily mean it's a great deal, so make sure to comparison shop for offers between sites. Keep in mind that generally, the larger the loan amount, the lower the interest rate. If you’re a reliable customer who pays your loan on time, and there is the potential for repeat business, online pawn shops may even tailor loan terms to your needs. UltraPawn, Pawntique and borro, for example, all include loans designed specifically for small business owners.
Know that online pawn shops involve a leap of faith, especially if you’re parting with a treasured item. Do your research to be sure you understand a shop's specific policies, like what happens if your item is damaged or lost, you want to pay the loan off early or extend loan terms or you miss a payment. (Most pawn shops have a grace period, which is a number of days you have to catch up on a late payment. Past that point, the item becomes their property and they can sell what you pawned.)
Should You Use a Pawn Site?
There's a reason traditional pawn shops don't have a great reputation: Using your possessions as collateral to borrow money isn't anyone's first choice. In fact, it may not be the right choice for you.
Before pawning off Grandma's ring, you might want to do some creative thinking. For example, taking out a pawn loan with 6% interest to pay down a credit card balance with 16% interest can save you money without showing up on your credit report. But, if you have a 0% balance transfer offer you could use instead, that may be the more cost-effective option. And you do need to consider the consequences, should you default.
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If there isn't a better option, you may also want to consider simply selling your items to the shop instead of taking out a loan. Pawngo CEO Todd Hills says that generally, selling items will fetch up to 80% of the retail value (compared to loan amounts more like 50-65% of the retail value). Plus, selling serves a dual purpose: creating cash and decluttering.
If you do decide to pursue a loan, remember that a pawn shop loan is still a debt. If you’ve already gotten in over your head financially, this is one more payment to add to the list. The consequences of unpaid debt are never good: with a credit card, a missed payment leads to fees and credit score damage. With a pawn shop, it could mean losing a treasured item forever.