In times when incomes stagnate, the cost of living rapidly increases or the economy heads into a tailspin, individuals may find themselves with little or no option but to exchange their valuables for cold hard cash in order to make ends meet. But will handing over your valuables really get you out of trouble? It could, but it depends on what you have to sell and how you go about it.

How Pawn Shops Work
A pawnbroker, the person who operates a pawnshop, will loan you money based on a percentage of the value of the item you want to pawn.

Typically, the terms of the exchange will include an interest rate on the amount of cash you receive and a deadline by which you must repay the loan, plus interest. Failure to meet this deadline can mean that you forfeit the item to the pawn broker. The limitations within which U.S. pawnshops are required to operate are governed by state law and, as such, there may be some differences among the policies and procedures for pawnshops in different areas.

"Pawnable" Items
Almost any item that has monetary value can be pawned. This includes articles of clothing, jewelry, household goods, housewares, motorized vehicles and tools. However, a general requirement is that the item is easily portable, easily transferable and small enough to be displayed at the pawnshop.

To Pawn, or Not to Pawn?
Pawning your valuables can provide quick access to cash without the credit check and paperwork associated with traditional loans obtained from brick-and-mortar financial institutions. And where you may not qualify for loans from these institutions, it is unlikely that a pawnbroker will refuse to loan you the funds as the item being held as security can usually cover the amount loaned. However, despite the ease with which you can obtain these "secured loans" from a pawnshop, careful consideration must be given to the idea before you decide to hand over your valuables.

The following are some of the points that should be considered:

How Invaluable or Irreplaceable is Your Property?
Consider the possibility that you will not be able to repay the loan on time, causing you to lose your property. Should that be the case, could you replace the item? If the item can be easily replaced, then it may be worth the risk. However, items with sentimental value, especially family heirlooms and customized items are usually irreplaceable. For these items, careful consideration must be given to your willingness to lose ownership.

How Soon Will You Be Able to Repay the Loan?
If you are sure that you will be able to repay the loan within the short term, pawing an item may make sense even if it something you consider invaluable. However, if you may not be able to repay the loan in the short term, consider whether it may make better financial sense to explore other loan options. The interest on a pawnshop loan adds up over time and can accumulate to a significant amount if the contract is in force for an extended period.

Consider Other Loan Options
If you can't afford to lose the item you intend to pawn, consider whether it is safer to pursue other loan options.

These include the following:

Asking Your Bank for Overdraft Protection on Your Checking Account
In most cases, overdraft protection can be obtained immediately and could provide the quick cash that you need. Of course, this too has its pros and cons. Compare the fees that you will pay on overdrawn balances to the interest you would pay on a loan received for a pawned item.

Borrow from Relatives or Friends
Borrowing from a friend or relative can be an attractive option. Because you know each other, the loan is usually made on good faith, and no credit check or paperwork is required. In some cases, you may be required to pay interest on the loan, but the rates are usually very low when compared to the rates charged on loans made by financial institutions.

Caution must be exercised in this area as many relationships have been irreparably damaged over money. Unless you are sure you will repay the loan within the agreed time frame and under the agreed-upon terms, this may not be a good idea as it could damage your relationship with the individual.

Shop Around for the Best Deal
Pawnshops are no different from other product and service providers when it comes to getting the best bang for your buck - or in this case, your pawned item. Compare the interest rates and the other terms of the agreement for different pawnshops before you decide which one to use. Where possible, check with other individuals about their experiences with particular pawnshops, so as to get some insight into their actual practices and their established policies.

Missed the Repayment Deadline?
All may not be lost if you miss the repayment deadline for a loan received for a pawned item. In some cases you may be able to renegotiate the terms of the agreement and extend the repayment deadline for a fee.

If the item has sentimental value to you or it's irreplaceable, check with the pawnshop periodically to see if it has been sold. If not, and your financial status improves, you may be able to purchase your item back. You will likely pay more than you received when you pawned it, but it may be worth it if its value to you goes beyond money.

The Positive Side of Pawning
Some of the best deals are available at pawnshops. You may be able to find unique items at reasonable prices, and more common items - with conditions ranging from never or gently used to overused - at below market prices. For instance, a piece of jewelry may cost you at least 50% less than it would had you purchased it at a jewelry store.

The Bottom Line
During times of financial straits, individuals often seek funding for necessities from various available sources. If you find yourself in such as situation and have considered pawning some of your valuables, be sure to do your homework before you choose a pawnshop. While there may not be much time to perform extensive research, a comparison of the pawn contracts should give you some insight into the differences and similarities of the rules to which you will be subjected. Finally, unless you are certain you will be able to reclaim the pawned item, look for other financing options if you consider the item invaluable or irreplaceable.

Related Articles
  1. Personal Finance

    12 Ways To Shop Smarter

    The early bird may catch the worm, but in shopping, the worm will come to those who wait.
  2. Personal Finance

    What to Collect: Apple Watch vs. Luxury Watches

    The "iWatch" is a new player in the luxury watch world. But will it stand the test of time? Some points for collectors to ponder.
  3. Personal Finance

    Buying Fur: Which Variety Is Worth the Most?

    Fur is once again hot among the haute couture set. A guide to getting the best skin for your style (and money).
  4. Insurance

    Designer Clothes: Why You Need Special Insurance

    You spend a lot of money on couture creations. Shouldn't they be protected from damage?
  5. Investing News

    3 Odd Investments Worth Considering

    Designer handbags, comic books and web domains: should these odd items be on your investing radar?
  6. Personal Finance

    Mobile Payments in 2015: When Will Cash Be Obsolete?

    A wave of new mobile payment technology is setting the stage for a revolution in how we buy in stores.
  7. Personal Finance

    5 Tips for Vintage Car Collecting

    Old autos. There’s just something about all that shiny metal that captivates our attention.
  8. Entrepreneurship

    How Does Glamsquad Work and Make Money?

    Learn about what Glamsquad does and how it makes money, including why the rise of the "Uber culture" has made this new luxury beauty business so popular.
  9. Personal Finance

    6 Tips for Investing in Antiques

    Historically, antiques are highly appreciating assets, but be prepared for a long-term investment.
  10. Professionals

    5 Unique Assets to Invest Your Retirement Money In

    Investing for retirement doesn't always mean 401(k)s and IRAs. Here are five unique assets to invest your retirement money in.
  1. What are the advantages and disadvantages to dealing with internet-only banks?

    In recent years, large companies have set up internet-only banks as a means of diversifying into the financial sector and ... Read Full Answer >>
  2. What is Black Friday?

    Black Friday is a popular label attached to the Friday following Thanksgiving Day in the US. This day marks the beginning ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  2. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  3. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  4. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
  5. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
  6. Cost Of Funds

    The interest rate paid by financial institutions for the funds that they deploy in their business. The cost of funds is one ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!