If you’re like most people, you’ve experienced needing urgent access to cash. It could be due to job loss, medical expenses, or simply the fact that your bills have piled up. It is also possible that you did not build an emergency fund and now you have gotten into trouble.
For situations like these, where do you turn to?
Financial help can come in many forms, the most common of which is taking out a loan, such as a personal loan or a pawnshop loan. Knowing the differences between the two will help you make a decision that will improve instead of aggravate the bind you are in.
What is a personal loan?
A personal loan is a type of financial product that gives you access to cash by borrowing from a bank or any financial institution. Typically, you need to meet a minimum credit rating threshold to qualify. Personal loan amounts vary and can be used for different purposes. While a collateral is not a requisite, some lenders may ask that you present one in order to be approved.
What is a pawnshop loan?
On the other hand, a pawnshop requires that you present a collateral in the form of an item, which will then be appraised and evaluated. The value of the item based on the appraisal will determine the highest amount of loan or money you can borrow. In general, the maximum loan amount is up to half the value of the item.
Part of the terms of a pawnshop loan is for you to pay the loan amount within the specified term, otherwise the pawnshop will seize the item you put up as a collateral and sell it so they can recover the money you were supposed to pay them. For example, if you used jewelry, any tech gadget or car as collateral, this means that you will lose this possession if you fail to fulfill your financial obligation.
Features, Risks and Advantages
Because it is a type of loan, pawnshop loans come with interest and fees that are usually higher than those related to personal loans. The exact interest rates and fees, however, depend on the state where the pawnshop operates.
Pawnshop loans are appealing because you don’t even need to have good credit rating to be approved since you will putting down a collateral. In addition, you won’t have to worry about your credit rating becoming adversely affected if you find it difficult to make payments on time. This is because pawnbrokers are not required to inform credit bureaus about any loan or payment information.
While it may be relatively easy to obtain a pawnshop loan, the biggest risk would be the loss of your collateral in case of default. And coupled with the fact that loan amounts average only $150 and loan terms last between 30 and 90 days, pawnshop loans may prove to be a costly option.
When you’re faced with the dilemma of needing cash quickly, know that you have alternatives other than taking out a pawnshop loan. For instance, you may be able to obtain a line of credit from your bank, which is works pretty much the same way a credit card does. Your bank will set a credit limit and if you use it, you will need to make monthly payments that include interest.
Another common alternative is an auto title loan where you can borrow money against the value of your car. In effect, your car becomes the collateral. The good thing is, an auto title loan allows you to continue using your car during the loan term and applying for one doesn’t affect your credit score either.
When you need access to cash quickly, getting a loan seems to be the default solution of most people. In most cases, a pawnshop or personal loan can help you get out of a financial rut. However, before deciding to take out any loan, understand how you got into that situation in the first place.
Pinpointing the reason/s why you where you are financially will help you take the necessary steps so you don’t end up in the same position in the future.