How Does a Pawn Shop Work? Pawning, Loan Options

According to the Federal Deposit Insurance Corporation (FDIC), only 1% of American households use a pawn shop each year. 

Despite that low percentage, you’ve probably heard of “pawning something” as a way to access emergency funds. Now, you might be asking yourself: How does a pawn shop work? 

You can use a pawn shop to secure a loan or sell something outright. But a pawn shop loan can come with crazy-high interest rates, so it might be better to find an alternative. 

Below, I’ll explain exactly how the process works. I’ll also suggest some other ways to access cash in a pinch. 

How Does a Pawn Shop Work?

A pawn shop typically offers two services:

1. Collateral loans. You borrow money from the pawnshop, and you leave an item behind as collateral. If you pay off the loan, you get the item back. If you don’t, the pawn shop sells the item.
2. Buying and selling products. You bring in an item you don’t want anymore, and the pawn shop will buy it from you before selling it to someone else. 

You can pawn pretty much any item, but the most popular products include:

• Jewelry
• God, silver, and other precious metals
• Watches
• Smartphones
• Antiques 
• Electronics
• Gaming consoles
• Musical instruments
• Sports equipment
• Power tools
• Guns

So, if you can spare any of these items, you could use them to secure a loan or sell them outright. 

What is a Pawn Shop Loan?

You can’t answer the question of “How does a pawn shop work?” without breaking down the details of a pawn shop loan.

With a pawn shop loan, you have to offer a piece of your property as collateral. That means you give something you own to the pawn shop, and if you don’t pay them back, they keep it.

In addition to the collateral, pawn shop loans tend to charge high-interest rates. According to some experts, some pawn shop loans even have a 240% annual percentage rate (APR) – meaning you’d pay 20% interest each month. The exact rate will depend on your location. The pawn shop industry is heavily regulated, and each state has its own rules about interest rates. 

Pawn shop loans typically have 30-day terms, meaning that’s how long you have to pay the money back. 

You came to this article asking, “How does a pawn shop work?” Well, I want to be as specific as possible – so here’s a step-by-step guide to using a pawn shop loan:

1. You bring an item to a pawn shop.
2. The pawnshop employee estimates the value of your item and offers you a loan. The more valuable the item, the more money you’ll be offered.
3. If you sign the loan agreement, you’ll be given the money – and your item will be stored at the pawn shop.
4. You pay off the loan (plus interest) before the term is up, and the pawn shop returns your item.

If you can’t pay off the loan, you can try asking for an extension, but keep in mind this will likely bring an additional fee and an increase to your interest rates. Also, be aware that if you miss the deadline altogether, the pawn shop will take possession of your item.

Pros and Cons of Pawn Shop Loans

If you started reading this article, you were probably asking, “How does a pawn shop work?” 

Well, I’ve answered that question – so now it’s time to answer another: Is a pawn shop loan really a good idea?

It can be, but not often. Here are the pros and cons to consider. 

Pros

• Pawn shops don’t care about your credit score. As long as you’ve got an item of value to pawn, you can secure a pawnshop loan.
• Your credit score won’t be at risk. With most lenders, failing to repay a loan is brutal for your credit score. But a pawn shop will simply sell the item you left as collateral without informing the credit bureaus. 
• You can get money immediately. If you’re truly in a pinch, a pawn shop loan offers an emergency solution. 

Cons

• The interest rates are extremely high. That means you’ll have to pay back significantly more than you borrowed. 
• You won’t receive the full value of the item you leave as collateral. Let’s say you have a watch that’s worth $500. You can’t use it to get a $500 loan! The pawn shop will only give you a portion of that amount.
• Most pawn loans have just 30-day terms. That’s not a lot of time to repay the loan, especially with your personal belongings on the line. 

Alternatives to Pawn Shop Loans

I’ve answered the question, “How does a pawn shop work?” This means that you should understand by now that pawn shop loans are expensive and risky. So, what else can you do?

Below, I’ve listed some of the best alternatives to pawn shop loans. 

Also, be sure to check out this article that has solutions in case you find yourself saying, “I need money desperately!”

The situation might seem dire, but there’s always a path forward. My job is to help you find it.

Personal Loans 

With a personal loan, a bank or credit union gives you a lump sum of money that you pay back with interest. It’s not free, and it can be hard to qualify, but it’s usually a lot cheaper than a pawn shop loan.

Plus, one perk is that you can apply for personal loans online. Upgrade and CashUSA are two online lenders that make the application process easy. With Upgrade, you can even check your rate before you send in a formal application. 

Unfortunately, it can be hard to qualify for a personal loan with bad credit – and if you’re asking, “How does a pawn shop work,” it might be because your credit score is in rough shape. 

But even with not-so-great credit, there are options. Learn more with this guide on loans for bad credit. 

For even more ideas, read this list of the best ways to borrow money. 

Borrowing Money Through an App

Want to borrow money? There’s an app for that! Several of them, actually – and they’re surprisingly easy to use.

Some digital banking apps, including Chime and Current, offer free overdrafts as part of the service. The Dave app is another option, giving cash advances up to $500. There’s also Cleo, an AI-powered platform that will lend you money. 

To learn more about these and other options, check out this complete guide to each borrow money app.

Delivery Driving

What’s better than borrowing money? Making money that you don’t have to pay back.

And thanks to DoorDash, it’s super easy to make money as a delivery driver. Just sign up online and start working a few days later. You’ll get to create your own hours, and you can work as much or as little as you want.

Sure, it involves working – but it’s much better for your financial health than taking out a pawn shop loan!

And if you’d like to make money for simply opening a bank account, check out these banks with immediate sign-up bonus.

Taking Online Surveys

If you want to make money without actually working, online surveys are one solution. Sites like Swagbucks and InboxDollars will pay you just for sharing your opinion.

This isn’t a way to make millions, but you can pad your bank account with a few dollars here and there. 

If you’re asking, “How does a pawn shop work,” it means money is probably tight. But don’t accept insanely high-interest rates before exhausting your other options. Taking online surveys is one alternative that’s definitely worth a try. 

For more ideas, check out survey sites like Swagbucks.

Playing Games 

Playing online games is a surprisingly legit way to make money online. All you have to do is sign up for a gaming platform and then play the games that seem most entertaining. You’ll get points just for playing, and then you can redeem those points for gift cards or actual money. 

As with surveys, playing games isn’t a long-term solution. You’re not going to make a living. But if you just need a few dollars to get through a rough patch, then you might as well give it a shot. 

Mistplay and Cashyy are two of the best platforms – but there are plenty of others out there. Read this full Cashyy app review to learn more.

For a full list of your options, check out this article on apps that pay cash. 

Commonly Asked Questions About How Does a Pawn Shop Work 

How Does Pawning Work?

When you pawn something, you use it as collateral for a loan. You bring the item to the pawn shop, they give you a loan, and you leave them the item. If you pay back the loan with interest (in a specific timeframe), you get your item back. Otherwise, the shop sells it. 

Is it Better to Pawn or Sell?

If you want to get the item back, it’s better to pawn it. If you don’t want the item back, then you might as well sell it. You could get more money that way, and you won’t have to worry about repaying a loan.

What Are The Rules of a Pawn Shop?

With a pawn shop, you have to leave behind an item as collateral in order to secure a loan. Typically, you’ll have 30 days to pay back the loan along with interest. If you don’t repay, the item you left as collateral becomes the pawn shop’s property. 

How Does The Pawning Process Work?

Pawning is a 2-step process. First, you go to the pawn shop – where you’ll leave an item as collateral and receive a loan in return. Then, you’ll pay the loan back (with interest) usually within 30 days and get your item back as a result.

How Does a Pawn Shop Make Money?

Pawn shops make money from the interest on loans and by selling retail goods. Let’s say you pawn an item. If you pay the loan back, the shop earns the interest. And if you don’t pay it back, the shop makes money from selling the item you left as collateral. 

How Long Do Pawn Shops Hold Items Before Selling?

With a standard pawn shop loan, you have 30 days to repay the loan. If you don’t make the deadline, you can ask for an extension – which could bring an additional fee or a higher interest rate. If you miss a deadline, the shop will sell your item. 

How Does a Pawn Shop Work When Selling?

When you sell an item to a pawn shop, you avoid having to take out a loan or pay interest. You simply leave an item at the pawn shop in exchange for money, then go on your merry way. 

How Does a Pawn Shop Work For Dummies?

You can sell an item to a pawn shop or use it as collateral to secure a loan. If you want a loan, you leave the item at the shop. You typically have 30 days to repay the loan with interest – and If you don’t, the shop sells your item. 

What Can You Pawn to Get The Most Money?

While you can technically pawn almost anything, some of the most lucrative options include jewelry, power tools, gaming consoles, electronics, musical instruments, and precious metals.