Is There a Better Option Than the Nearby Pawn Shop?

Many people have few options when a financial emergency arises. Maybe cash is tight and they don’t have an emergency fund; maybe they have bad credit and don’t have access to a credit card or loan option; maybe they don’t have friends or family members who can lend them money in a dire straits situation.

While there are countless barriers that can prevent people from having access to credit or cash flow, most people at least own some “stuff,” — maybe some jewelry, an instrument, or other valuable objects —  which means they may consider turning to a nearby pawn shop to help cover the cost of their emergency.

If this sounds like you and you have already decided to part ways with some of your personal belongings, it is worth considering if your local pawn shop is actually the best destination for the aforementioned objects.

How pawn shops work

While your perception of a pawn shop might paint a picture of a place that purchases your valuables outright, that is often not the case. Rather, pawn shop owners tend to offer loans using the object you have brought as collateral. In other words, if you do not pay off the loan, you will lose the item you left at the store.

Pawn shop owners usually prefer this arrangement, as they can make more money from the interest on the loan than they would likely make from selling the item. The interest rates on pawn shop loans tend to be higher than rates on traditional bank loans and are normally accompanied by service fees. Finally, the payment terms on pawn loans tend to be short, so if you are not careful, you could end up paying a large amount in interest while still losing your collateral.

Risks of pawning personal belongings

Even if you have to pay relatively high interest rates as part of the trade, it is not guaranteed you will be able to get a loan or sale price large enough to cover your needs.

Logan Allec, CPA, owner of personal finance website Money Done Right, warns against this.

“The stereotypes for pawn shops exist for a reason: You will get very low value on your items if you go to a pawn shop,” he says. “In fact, you can expect to be offered no more than $20 for a $100 item. While this could seem appealing in a financial emergency, the amount of money you’ll lose is simply not worth it.”

Additionally, you could end up with a pawn shop that is less than scrupulous in their practices. As an example, Rebecca Beach, a finance blogger at Mom Beach, shares her own experience:

“When I was in college, I was extremely poor. I could not afford much of anything since all the money I made from my part-time job went to books and low-cost food.

“At the local pawn shop, I regularly pawned my flute and other valuables in order to get money until payday in order to eat. I was in the marching band, so I needed my flute on the weekends. I ran into some trouble after I had pawned my flute for the fifth time. My boss at the furniture repair shop could not afford to make payroll that Friday so I had no money to get my flute on time.

“The pawn shop would not work with me and I ended up losing my flute. I had to miss marching band practice that weekend since I had no instrument. A risk with pawn shops is losing the item that you had pawned if you can't pay on time. Never pawn valuables like family heirlooms in the hopes of getting them back after payday.

"There is also the chance your item may not be there, or in the same condition, when you go to retrieve it," Beach says.

“I pawned my Playstation 3 and the pawn shop accidentally misplaced my working console with one that didn't work. I received one that didn't work when I came back on payday.”

Pawn shop alternatives

Instead of immediately taking your valuables to a pawn shop, you should do some research and see if you could get a better deal selling them on Craigslist, Ebay, Facebook Marketplace or other similar sales apps, or even to a friend or family member.

"It may also be worth asking for help before you resort to giving up your treasured possessions," Allec says. Crowdfunding sites like GoFundMe allow for people to fundraise for financial emergencies and other unexpected circumstances by sharing their story online through the platform.

“These campaigns are often put up by individuals who need funds and quickly,” he says. “If you are in need of funds and believe your personal story could lead to donations from others, then a GoFundMe page could be a worthwhile strategy to explore.”

Think before you act

It can be easy to lose your head in an emergency. Taking a moment to evaluate your situation and consider all options may result in a better choice than your neighborhood pawn shop.

Logan Allec is a CPA and owner of the personal finance website Money Done Right. After spending his twenties grinding it out in the corporate world and paying off more than $35,000 in student loans, he dropped everything, and in 2017, launched Money Done Right. His mission is to help everybody—from college students to retirees—make, save, and invest more money. He resides in the Los Angeles area with his wife Caroline. Follow him on Twitter @moneydoneright.

Becky Beach is a money saving expert and finance blogger at MomBeach.com. She is married with a son named Bryan, and enjoys shopping at flea markets to find the best deals. Follow @themombeach.