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By Carol Church

Have you ever visited a pawn shop? Businesses like these have been in business in one way or another for thousands of years. Pawnshops offer an opportunity for people in need of money to get a short-term loan by offering their belongings as collateral.  Although bringing possessions to a pawnshop can be one way to obtain cash when money is short, it’s important to understand the pawnshop model.

How Does It Work?

The way it usually works is this:

  • You bring in your item. Typically, pawnshops are interested in relatively valuable goods, such as electronics, jewelry, tools, firearms, and musical instruments.
  • The pawnshop tells you if they are interested and how much they will offer. Bargaining is typical. The amount you receive will not be the full value of the item.
  • If you both agree, you are given the agreed amount of money and a ticket or claim form.
  • You are now agreeing to a loan, with interest. In order to get the item back, you must repay the loan. It’s important to understand the total amount due and when it is due. Usually, you get about 1-4 months to repay.
  • If you repay the total amount within a specified time, you can go reclaim your item. If you do not, the item now belongs to the store, who can sell it.
  • In some cases, one can also simply sell belongings to a pawnshop outright, with no agreement to come back and reclaim them. However, most pawnbrokers prefer the collateral loan option. This is because it will make them more money.

What Should Customers Know Before Dealing with A Pawnshop?

  • Research pawnshops in the area beforehand to find out which ones are considered reputable and which are not. Some pawn shops also specialize in certain kinds of items.
  • Customers should be sure to completely understand the terms of the loan—when is it due? What is the total amount due? The pawnshop MUST disclose this information, by law.
  • In some circumstances, it is possible to extend the length of a loan, but this will incur additional fees.
  • If customers lose their ticket, they will probably not be able to reclaim their item.
  • One must show government-issued ID to conduct a pawnshop loan.

Pros and Cons of Pawnshop Loans

Pawnshops can be appealing because they offer the chance to acquire a small loan of money quickly and fairly easily with no credit check and a minimum of red tape. In addition, if a customer is unable to return to repay the loan and claim the item, his or her credit will not be damaged. According to the National Pawnbrokers Association, 80% of consumers do return to claim their items.

The downside of pawnshop loans is the high interest they charge, though this varies by state. In some cases, pawnshops also engage in deceptive practices by advertising low APRs, but then tacking on numerous last-minute fees.

Pawnshops and Members of the Military

However, there is an important caveat to this interest rate warning for members of the military. Thanks to the protections of the Military Lending Act, pawnbrokers are now limited as to how much interest they can legally charge active members of the military and their dependents. The rate is now capped at 36% annually (3% a month).

This new law has been controversial and pawnbrokers are currently suing the government in regard to it, but for the time being, it stands. All pawnshop owners are required to check with customers regarding their military status. Be aware, however, that a pawnshop may also legally refuse service to military members.

Alternatives to Pawnshops

Consumers and members of the military who find themselves short of cash and in need of a short-term cash infusion to tide things over do have other options. If parting with some consumer goods that are no longer needed still seems like the best option, selling the item on Craig’s List or eBay might well produce a larger profit without the issue of interest. Other options include a small personal loan from a bank or especially a credit union, working with a creditor to develop a payment plan (if debt is the issue), a cash advance on a credit card, or even a peer-to-peer lending platform such as Lending Club. For military members, special relief programs like Army Emergency Relief offer zero-interest loans and other help.

Pawnshops do serve a unique function as far as their ability to offer small collateral-based loans without requiring a credit check or impacting credit, but it’s important to keep in mind that they are often considered a type of predatory lending that takes advantage of people in poor financial situations. Customers should exercise caution and care before dealing with a pawnshop.


Consumer Financial Protection Bureau. (2016). CFPB Takes Action Against Pawn Companies for Deceiving Consumers About Loan Costs.

Dempsey, B. (2016). Pawnshop 101: What you need to know.

Gonsalves, R. What Pawn Brokers Need to Know About the Military Lending Act (MLA). (n.d.) Rules of trade for pawn shops and pawnbrokers.