Pawn Shops or Payday Loans? – The Best Way to Access Fast Cash
There’s a lot of money in desperation. So much so, in fact, that the government recently came down on the Payday Loan industry for charging exorbinent fees and interest rates to customers seeking short-term loans. And for good reason. While these types of loans are certainly high-risk for the company offering the loans, it does not justify exploiting consumers who are in a desperate situation. With new regulations in place, more reasonable Payday loan offerings should replace those that are now so expensive they are deemed illegal.
Payday loans are used due to their quick accessibility and simple loan requirements. Despite the high costs, they do provide users with cash very quickly.
The other traditional way to accomplish getting fast cash is through a pawn shop (or frequently, cash for gold). The theory here is that you’re providing an item of value for collateral in exchange for cash. You can come back later and pay for the item plus interest (usually a good idea), or if you do not return to pay for the item, the pawn shop then owns it and can sell it as they please. While this happens, the valuable is supposed to be used as collateral rather than with the intention of someone not coming back for it. Generally, the cash offered is lower than the items worth, so it’s advantageous to come back and repurchase it with the interest expense.
In a way, these services are similar. Both are charging interest for a fast loan. However, Payday loans charge higher interest rates since there is no asset in their control backing their validity, and they are likely to come after you through the legal system if you do not repay the loan (or the significant amount of interest on it). You can imagine why Payday loan companies are not seen as being very friendly. Pawn shops have lower interest rates and no pressure due to the fact that they have a valuable of yours in their possession that becomes theirs if you don’t pay for it in time. The loan is typically very favorable for the pawn shop (maybe they give you $300 for a $500 item), so if you don’t pay for it they can make a nice profit, but the design of the system is more to simplify the transaction and have you pay it back with interest very soon.
Pawn Shops were actually the preferred method of getting short-term loans for decades, or even larger loans before banks came around. They were used as asset-backed loans to provide individuals with fast and easy liquidity, and pawned items were reclaimed the vast majority of the time (items would often only spend a few days locked up). With the more ready availability of capital in recent times, they have somewhat lost their luster. But still, they are frequently used for short-term loans to get someone to the next Payday.
If you have something of value and are expecting a payment in the near future that will ensure you can pay back the pawn broker, using a pawn shop is the best option. It ends up being a painless transaction for most people, and usually worth the interest payments. We’d just caution to not pawn items with sentimental value if you can help it. Circumstances can get difficult, and if you become unable to pay, you don’t want to lose something that is special to you or your family. Scrap gold is great for this kind of thing, or you could consider high-end electronics which you don’t use frequently.
According to the pawn shop at Ridge Coin, diamonds and gold are the most frequent items pawned, and even with those most people are able to repay their loans in a reasonable amount of time. And they prefer that you do. No one wants short-term loan transactions going south, but at least with a pawn shop you’re just losing a valuable item (that you were essentially paid for, but under market value), rather than accumulating more and more fees and being threatened with legal action.
Don’t want to use a Payday loan service or pawn shop, but still need cash quickly? You could always ask for a loan from a family or friend, overdraft your bank account (be prepared for some fees there too though), or if you have a little more time borrow against your 401k or try to get a loan against your home (or even car). But like any loan, if you’re putting up collateral and you don’t pay it back, you will get repossessed.
The best thing you can do is be prepared so you don’t get into one of these situations. Financial analysts recommend keeping 6-months living expenses as a “safety net” should you need money quickly or something bad were to happen. Many people may not have the luxury of that many months of savings, but still having $500 set aside for a rainy day could prevent you from a very expensive transaction with a lot of interest, losing something precious to you, or even legal action.
But when in doubt, we recommend using a trustworthy local pawn shop over a Payday service any day. Be sure to fully research and vet potential local pawn services. See how long they’ve been in business and read any local reviews you can. Know the value of the item you want to pawn before bringing it in to help you decide which item you’d most readily give up. Lastly, make sure all your paperwork is accurate and put in a safe place so when it comes time to repurchase your items, there isn’t any doubt as to what is yours and the price you need to pay for it.