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.

Key Takeaways

  • A pawnbroker will loan you money based on a percentage of the value of the item you want to pawn.
  • Pawnable items should be easily portable, easily transferable and small enough to be displayed at the pawnshop
  • Pawning your valuables can provide quick access to cash without the credit check and paperwork associated with traditional loans 

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 pawnbroker. 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. For instance, small personal loans allow you to acquire a reasonable amount of financing without any collateral.

Below are several other options.

1. Ask 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.

2. 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.

3. 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.

Renegotiate the terms of the agreement

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 if you had 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 a 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.