Pawnbroker loans

When you apply for a loan, it is hard for a lender who doesn't know you to trust that you will return the money as promised; that is why we have credit scoring systems and collateralised loans.

A pawnbroker loan is also a collateralised loan but on a smaller scale; you submit items you own and are lent money against those items. Whatever your circumstances, pawnbrokers are the one channel where you're sure of getting a loan provided the items you put up are valuable.

How it works

Pawnbrokers still mainly operate from high street shops which can be found in towns across the UK. Most will only accept items of jewellery such as diamonds, gold or platinum, although some also have arrangements for other items.

The pawnbroking process is fairly straight forward; you walk into store with your items and ask to have them pawned, you should take some form of identity with you as they will ask for it.

The agent will take you through the details and inform you of your rights under the Consumer Credit Act 1974. They will then do a valuation of your items, after which they will tell you how much money they're able to lend you and how much interest will be charged. If you're happy with their offer you can accept, if you're not happy you can walk away; such offers are not binding.

If you accept the offer, you can sign the contract and leave with the money. You're expected to pay the money back within 6 months, at which point your items will be returned to you in the same condition they were in.

Advantages

Loans over a longer period of time
Unlike payday loans, pawnbroker loans can be for a period of up to six months, you also pay in one instalment at the end of the loan term, this can allow for some breathing space.

No penalties for paying early
If you manage to get the money earlier than the agreed loan term, you can repay the loan without facing any early repayment penalties.

Some protection on high value items
Most people would expect that if they fail to repay the loan, the pawnbroker automatically assumes full ownership of their items. But in fact, for items valued over £75, the Consumer Credit Act 1974 requires that the pawnbroker refund the difference; should they have to sell your items and the sale price is more than what you owed including interest.
They will also have to give you notice of the impending sale before they're able to sell your items.

Disadvantages

You can lose your items
There is always the risk of failing to get the money in time to repay the loan, and if your items were valued under £75, the pawnbroker will automatically assume ownership. Most UK pawnbrokers give you the option of extending the loan and only paying the interest, this would give you more time to find the money and save your items.

High interest
Most pawnbrokers charge above 60% APR interest rate, considering that these are collateralised loans and the risk of the lender losing their money is minimal, a 60% interest rate is too high.

Alternatives

Payday loans
This is only a good alternative if you don't have any items to put up for a pawnbroker loan, otherwise they are less favourable in every aspect, see more on payday loans. If you need to borrow a high amount but have bad credit, loans for people with bad credit are another alternative; these are likely to charge a lower APR interest rate than pawnbroker loans and they allow you more time to repay.

Bank overdraft
This is a better option than a pawnbroker loan as you pay less interest and there's less hassle involved. However if you exceed the authorised overdraft, banks will normally apply a fine which would far exceed the interest on pawnbroker loans.