The expensive car, grandma’s gold chain or a luxury watch – these and even more valuables can be loaned in a pawnshop, so that short-term liquidity can be achieved. It is one of the easiest ways to get cash. But what about the conditions? Is a pawnshop a reasonable alternative to conventional borrowing at the bank? Which dangers hide with a pawn shop? We would like to answer all these questions in this article.
What’s a pawnshop?
In almost every larger city there is at least one pawn shop. It is a company that lends valuables of all kinds for cash. Some pawn shops have specialized in lending only certain valuables, such as cars or antiques. Mostly it does not matter which objects are to be lent, they should be able to be sold again.
While pawnshops used to enjoy a rather bad reputation, they are visited today by almost all groups of people – from entrepreneur A to private person Z. Today most pawn shops resemble a modern bank, because they are equipped with different counters where the customer can discreetly present his request.
How does a pawnshop work?
The value of the item to be pawned is estimated by the pawnbroker directly in the presence of the customer. A pawnbroker’s contract is then drawn up and the previously agreed amount is paid out in cash. In the contract a certain period is agreed upon – usually 3 months – in which the customer can redeem his borrowed objects. For this purpose he pays back the loan amount including fees and interest to the pawnbroker, whereupon he can take his valuables home again. If the amount cannot be paid within the three months, the pawnbroking contract can be extended under certain circumstances. However, fees will be charged again and interest will continue to be charged.
If the valuables are not redeemed after four months at the latest and the pawn credit is not extended either, the pawnbroker can now auction the items. As far as the proceeds are higher than the credit including all fees and interest, the surplus will be paid out to the pawnbroker. If the goods cannot be auctioned, however, they may be offered for sale in the shop.
Pawn credit and instalment loan: What are the differences?
A pawn credit is a loan in which the pawner (or borrower) deposits movable valuables as security for the money borrowed. The customer therefore brings items to the pawn shop and immediately receives a certain amount of money on loan. Such a pawn credit can be obtained without great bureaucratic effort. Only a valid identity card must be presented in the pawn shop.
The whole thing is different with an installment loan, which is applied for at a bank. Here, before the loan amount is approved, proof of creditworthiness such as salary statements or similar is usually required and a positive Experian report must also be available as a rule. Furthermore, the pawn credit and the instalment credit also differ in terms of repayment: While the pawn credit has to be redeemed after a certain period of time, the instalment credit is redeemed in monthly instalments.
When does it make sense to take out a mortgage loan?
A pawnbroker’s loan from a pawnbroker makes sense when short-term financial bottlenecks have to be bridged. Prerequisite for this is of course, that there are enough valuables available, which bring in the required income. It is important to go to a pawn shop with realistic expectations, because there can certainly be setbacks – for example in determining the price. Some gold jewellery has even turned out to be a cheap copy and especially with heirlooms, where the emotional value is usually very high, the customer should be careful.
It is also important that the customer is aware in advance of what and how much he can and wants to borrow. Electrical appliances, for example, usually bring in only a fraction of the sum they are actually worth. In such cases one should consider whether a sale is not the better alternative.
In addition, before going to the pawn shop, the customer must be able to weigh up well whether the financial situation can and will improve again in the foreseeable future, as this is the only way to release the valuables. If you extend a pawn credit several times, the high fees and interest quickly make it unprofitable.
For whom is a pawn credit suitable?
If you are looking for a long-term loan, a classic installment loan is much better than going to a pawn shop. However, if you only want to bridge a financial bottleneck in the short term, the pawn shop is a simple, fast and unproblematic alternative that offers a lot of flexibility. As an alternative, however, an immediate loan is also an option, where you can also get money quickly. However, the Experian entry often plays an important role, whereas you would not have the problem with a pawn shop.