How Do Pawn Shops Loans Work?

February 01, 2020 - Pawn Resources

Did you know one in five consumers in the United States have no credit history whatsoever?

And that about 51 percent of credit-active consumers have poor or bad credit?

If you belong in this group, you certainly know how challenging it is to secure loans from formal lenders. They will either reject your loan application or adjust your interest rate skywards.

It’s primarily for this reason millions of Americans turn to pawn shop loans. Pawn shops are ideal for those who need quick cash, and they don’t care two hoots about your credit score.


In this article, we are answering the question “how do pawn shops loans work?”

You Need a Valuable Collateral

Pawn shop loans are secured loans. You offer a valuable collateral to the pawn shop owner and in exchange, you get the cash.

Pretty straightforward, right? Not quite.

Let’s say you have a $3000 Honda Rebel motorcycle gathering dust in your garage. Suddenly you’re in a hole that quickly needs $3K, and you think of pawning it for that amount.

It’s not until you get to the pawn shop that you get your first setback. Sure, the pawnbroker loves the Rebel, but only offers you a maximum loan of $1,000. Take it or leave it.

Well, that’s how pawn shop loans work. You’ll typically get a small fraction of the asset’s value. However, once you develop a business relationship with the broker (means being a regular customer and having a solid repayment record), you can negotiate up to 60 percent or more of the item’s value.

Note it’s possible for a pawn shop to reject the item you’re offering as collateral, regardless of its value. Perhaps the shop owner thinks it won’t sell easily should the situation call for it, or you lack proper ownership documentation.

Defaulting Means You Lose Your Asset — But Not So Fast

Loans must be repaid, together with the interest amount and any other additional costs. And if you fail to honor your end of the deal, the pawn shop will have no choice but to take ownership of your collateral and sell it to recover the money, and even make a tidy profit.

Okay. It’s not often that a pawn shop will sell your item immediately your loan enters default. It’s common for these shops to offer repayment extensions, but clients usually incur additional charges. Nonetheless, about 80 percent of pawn loan borrowers reclaim their property.

Depending on your state’s laws, you might be entitled to a part of the proceeds from the sale, usually when the sale brings in more money than what you owed (loan amount plus all additional charges).

Interest Rates Vary from State to State

Pawn shops are generally heavily regulated. Specific figures vary from state to state. In Ohio, for instance, pawnbrokers can charge no more than 5 percent interest a month.

If you’re a savvy money manager, though, the rates shouldn’t worry you too much. Only borrow when necessary, don’t borrow more than you need, and avoid pawning an item you cannot afford to lose. Also, aim to repay the money within the shortest time possible to avoid incurring rollover costs.

How Do Pawn Shops Loans Work? Now You Know

It’s normal to ask to ask “how do pawn shops loans work” when you’re considering pawning an item. You want to know what you’re getting into, and how to make the most of the deal. After all, information is power.

Looking for more pawning tips? Explore our blog.

David Stiebel
David Stiebel

David Stiebel is one of the cofounders of PawnGuru. David was educated at MIT, where he studied Math. He subsequently worked at Bain as a data scientist before starting PawnGuru in 2015. He started PawnGuru to build a better tool for pawn shops and consumers to connect.

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Avatar for Steele Honda

Steele Honda

May 31, 2019, 1:44 AM

Thanks for detailing how pawn shop loans work. I appreciate that you pointed out that you need a valuable item to use as collateral for the loan. I am thinking about getting a pawn shop loan because I think it would be a good way to get the cash that I need right now so I’ll have to see what items I have that will work.

Avatar for Stefan Bradley

Stefan Bradley

August 12, 2019, 5:18 PM

I didn’t know that you can negotiate up to 60 percent or more of an item’s value if you maintain a business relationship with your broker. My wife won’t be able to afford rent as a result of a recent hospital visit, and we need to find some money so that we aren’t kicked out of our apartment. I think it would be a good idea for us to find a pawnshop that we can get a loan from at a reasonable price.

Avatar for Ashley


October 11, 2019, 9:08 PM

I liked that you said that one thing to consider when you are thinking about taking out a pawn loan is to make sure that you follow the agreement carefully in order to avoid the loss of collateral. I have been thinking about taking out a pawn loan with my husband but we haven’t been sure how this process works exactly. We will be sure to gain information on this subject and we will be sure to hold up your end of the deal in order to ensure a gain of collateral and not a loss thereof.

Avatar for Eileen Benson

Eileen Benson

November 4, 2019, 7:50 PM

Thanks for explaining that the collateral for a pawn loan needs to be valuable enough that the owner thinks it’ll be able to sell if the need arises. I’ve been thinking about pawning some of my items because my husband and I are having trouble making rent this month. Your article helped me see that using some of my nicer jewelry for loan collateral would be a good idea.

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