Short answer: with a pawn loan you leave an item, such as jewelry or a computer, with a pawnbroker and get cash. To get the item back you pay a larger amount, the redemption price, by an agreed date (Regulation Z). If you do not, the pawnbroker keeps the item. Pawn loans are short, typically 30 days or less (CFPB), so even a small dollar charge can mean a high APR. A personal loan is repaid in installments over months and does not put an item you own in the lender's hands.
How each one works
| Pawn loan | Personal (installment) loan | |
|---|---|---|
| What secures it | An item you hand over; the pawnbroker holds it for the whole loan | Depends on the loan: unsecured, or secured by something such as a car or savings |
| How you repay | One payment of the redemption price by the agreed date | Monthly payments over the term |
| If you do not repay | With a non-recourse pawn loan, the only remedy the pawnbroker has is to keep the item (12 CFR 1041.3(d)(5)) | Late fees, late payments on your credit reports, collections, possibly a lawsuit |
| Disclosures | A Truth in Lending disclosure: the amount financed is the cash given to you, the finance charge is the redemption price minus that cash plus other finance charges, and the APR uses the agreed term (17(c)(1)-18) | A Truth in Lending disclosure with the APR, finance charge and payment schedule (12 CFR 1026.18) |
Whether a pawn shop reports to the credit bureaus, what it may charge and how long you have to redeem depend on the shop and on state law; ask before you pawn. For a loan secured by your car instead, see vehicle title loan risks.
The cost: $300 for 30 days, and longer
Assumptions: a $300 pawn loan with a redemption price of $360.00 after 30 days, so a finance charge of $60.00; and a $300 installment loan at 36% APR over 4 months. These are examples, not quotes. The pawn APR is worked out as finance charge / amount financed x 365 / days.
| Option | What you pay | Charges | APR |
|---|---|---|---|
| Pawn, redeemed after 30 days | $360.00 once | $60.00 | 243% |
| Pawn, extended 3 times by paying the charge, then redeemed | $60.00 every 30 days, then $360.00 | $240.00 over 120 days | 243% |
| Installment loan, 4 months | 4 payments of $80.71 | $22.84 | 36% |
Installment payment: P x r / (1 - (1 + r)-n), with r = APR / 12, rounded to the cent. Not every pawnbroker allows extensions, and state law sets the rules; the second row shows what happens to the cost if you do. Among consumers who had taken out a pawn loan in the six months to June 2019, 73% still owed money on one when surveyed, which the CFPB says suggests rollovers or new loans (CFPB 2021).
Check the APR on the ticket
Pawn charges can be split into fees with different names. In 2016 the CFPB sued four Virginia pawnbrokers, alleging that charges called "appraisal", "storage" or "setup" fees were left out of the disclosed APR, understating it in many cases by as much as half; the complaints were allegations, not findings (CFPB). Add every charge you must pay to get the item back, and check that the APR reflects all of them.
When each one fits
| A pawn loan may fit if | A personal loan may fit if |
|---|---|
| You need a small amount for a short time and can repay it at the agreed date | You need more time, and a fixed monthly payment fits your budget |
| You can live without the item if you end up not redeeming it | You do not want to risk an item you need or value |
| You do not want a missed payment to go to collections | You can compare APRs and total cost on a disclosure before you sign |
Lower cost options may exist: see payday alternative loans from credit unions.
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Disclosure: Modern Lending Solutions is not a lender, loan broker or agent for any lender or loan broker, and does not make credit decisions. Any compensation we receive is paid by participating lenders, only for advertising services. This guide is general information, not financial or legal advice.
Sources
- CFPB: Regulation Z, 12 CFR 1026.17, official interpretation 17(c)(1)-18 Pawn transactions
- CFPB: 12 CFR 1041.3(d)(5) Non-recourse pawn loans
- CFPB: Consumer use of payday, auto title, and pawn loans (research brief, May 2021, PDF)
- CFPB: CFPB takes action against pawn companies for deceiving consumers about loan costs (December 2016)
- Regulation Z, 12 CFR 1026.18: content of closed-end disclosures