Pawnshop loans can be convenient, but they're costly — though not as costly as payday loans.

Here’s what you need to know about borrowing from a pawnshop — without spending too much money or losing property in the process.

How does pawning work?

Pawnshops may accept good quality vinyl records and instrucments
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Pawnshops may accept good-quality vinyl albums and musical instruments.

To take out a pawnshop loan, you'll need collateral for the business to hold while your loan is outstanding.

Pawnshops might accept jewelry or coins; high-quality tools or firearms; musical instruments, vintage turntables or rare vinyl records; name-brand digital camera gear; or very recently released electronics, such as the latest smartphone models, laptops or tablets.

They rarely accept out-of-date technology, damaged items or toys. When in doubt, call ahead and ask if a shop will accept your item.

If you can't pay off your loan, a pawnshop will keep your item — and sell it.

The U.S. has close to 12,000 pawnshops, and if you're shopping around for one, you might check for membership in the National Pawnbrokers Association, or NPA. The trade group has adopted best practices and a code of ethics, to keep the industry professional and reputable.

What's the process at a pawnshop?

The staff will assess your item’s condition and resale value
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The staff will assess your item’s condition and resale value.

Pawnshop loans are small, averaging $150, according to the NPA. If you need a modest short-term loan and you don’t want a lender to perform a credit check, a pawnshop loan might work for you.

Here’s the process:

  1. You take a valuable item you own to a pawnshop.
  2. The staff will assess the item’s current condition and potential resale value to determine how much it's worth.
  3. The shop may offer you a loan of about 25% to 65% of the item’s resale value.
  4. If you accept the loan, you're given the cash and a pawn ticket. Hold onto the ticket — don't lose it. You'll need to present it to the shop to get your item back.
  5. You should return to the shop within the agreed-upon time frame, usually within 30 days or a few months, to pick up the item. You’ll pay off the loan, plus the interest and fees. Those charges can vary by state; some states have placed caps on pawnshop interest.

You might extend the loan — and pay more interest and fees. You also have the option to not repay the loan: The shop will keep your item, and the transaction is complete. The pawnshop won’t report you to the credit bureaus or put collectors on your tail, because it got to keep the collateral.

How high are the costs?

The pawn shop will give you a ticket and explain the interest rate and fee
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The pawnshop will give you a ticket and explain the interest rate and fee.

Here’s an example of how pawnshops charge interest and fees.

Say you decide to pawn a smartphone. After assessing its value, the pawnshop may offer you a loan for $100 at 2% interest ($2), plus a 20% fee ($20). When you return to repay your loan, you will owe $122.

If you need to extend the loan, the $122 will become the new principal, and the shop will charge the same interest and fee as before.

The interest plus fees charged by pawnshops can be equivalent to paying interest rates of 240% or more, according to the legal website Nolo.com.

That's steep, though not as high as the effective 400% interest typically charged by payday lenders.

But you're likely to find better options than a pawnshop loan, even if you have bad credit. For example, if you have a low or even no credit score, you might qualify for a personal loan, generally at interest in a range of about 6% to 36%.

Pawnshop loan pros and cons

Pawnshops might accept valuable gold jewelry.
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One risk is you may lose your valuable item if you don't repay the pawn loan

Pros:

  • A pawnshop won’t report you to the credit bureaus, so the loans won't affect your credit reports or credit scores.
  • You can just walk away from the loan.
  • Pawnshops offer small loans, which are convenient if you need quick cash — but they won’t cover big expenses, like a major medical bill.

Cons:

  • High interest — much higher than on a personal loan.
  • You’ll need to give something you own as collateral, and you may end up losing it if you can’t repay the debt.

Alternatives to visiting a pawnshop

When you need cash in a hurry, consider pursuing these cheaper alternatives to pawnshop loans:

  • Ask for a payroll advance or cash advance from your employer.
  • Ask for a grace period for a bill.
  • Open a 0% balance transfer credit card.
  • Consider a personal loan, even if you have credit issues.
  • Sell a valuable item through regular channels, such as eBay or, for a vehicle, a used-car dealer.
  • Ask for help from family and friends.

A pawnshop loan might be helpful when you're in a financial jam, but you have other options that can cost much less — if they cost anything at all.