When you need money fast, it pays to know the difference between pawn loans vs payday loans before you have to make a decision. Nearly half of the people in this country live paycheck-to-paycheck. When an emergency, like a car repair or dental emergency, occurs, they have no savings to cover the expense. Getting any loan to spend on something frivolous is never a good idea. However, when you need your car to get to work, a short-term loan becomes a necessity.
The primary difference between payday loans and pawn loans is that a pawn loan is a secured loan using collateral. The value of the item you pawn will determine how much you can borrow against it.
A payday loan, on the other hand, is more like a traditional loan except that it is short-term. The amount of the loan is based on the amount of money that you get in your regular paycheck.
Differences between Pawn Loans vs Payday Loan
Payday Loans
Maximum Loan Amount
Payday loan stores usually have a chart of loan amounts that they offer. They will determine the maximum amount that you can borrow based on your income. Depending on the company, the minimum may be from $50 to $100 while the maximum is anywhere from $300 to $1000.
Documentation Required
Since a payday loan is based on your income, you will need verification of employment, at least one payday check showing the amount of income, a checking account, bank statement, and possibly proof of residence.
You will have to provide the names and contact information of two to four references in case you fail to repay the loan.
Bad Credit
Most payday loans do not require a credit check. Instead, they require a valid check that gives them a direct line to your income.
Interest Rate
The interest rates on payday loans run from 390% to 780% APR. When you borrow $100, you will have to repay the $100 plus a fee of somewhere between $35 to $60 or more.
Pay Back Period
Most payday loans are based on the period you get paid. For example, if you get paid every two weeks, the term of your loan will be two weeks from your next payday. If you get paid in one week from the time of your loan, your repayment will usually be in three weeks.
Pay Back Method
Some payday loans must be picked up in person by the due date and you will get your check back in return for the cash payment. Some will present the check to your bank for payment. Online payday loans are usually deposited into your bank account and payment is received electronically in the same way.
Available To
In most states, borrowers must be 18 years of age or older. Payday loans are often not made available to military personnel because of predatory lending laws. Payday loan companies cannot charge some fees to military personnel that they charge other customers.
How it Works
When you go to a local payday advance store, you will submit your documentation. They will use the information you provide to determine if you qualify for a loan and, if so, what your maximum loan amount will be. You will write them a check for the amount of your loan plus the fees that apply. They will either give you a check or cash in the agreed amount.
If you get a payday loan online, the cash is typically deposited into your bank account on the next business day.
Pawn Loans
Maximum Loan Amount
The pawn shop will determine how much they will loan you based on the value of the item you pawn. Most pawn shops take items like jewelry and electronics but it varies. They will do an appraisal of the item to determine its value. The offer of a loan will not be for the full value as a way of covering their expenses if you do not pay the loan payment.
Documentation Required
Most pawn shops require ID.
Bad Credit
You don’t need a credit check to get a pawn loan. Since you use collateral for this type of loan, defaulting on payment will result in losing the collateral. If you fail to pay the loan, you don’t have to worry about damaging your credit score.
Interest Rate
Pawn shop loans also have interest rates but they are usually much lower. Expect to pay anywhere between 10% to more than 200% for some. If you use a pawn shop that offers your first loan interest-free, you will have to pay back a lot less money with a pawn loan.
Payback Period
Options for loan renewables vary among pawn shops but repayment is not usually required for at least a month. You should make sure you understand the terms of the loan repayment before signing an agreement.
Payback Method
You will pay your pawn loan in person where you will pick up the item you pawned.
Available To
You must be at least 18 years of age to enter into a pawn agreement.
How it Works
When you go into a pawn shop, you will take the item you want to pawn. You will need to specify whether you want to pawn the item or sell it outright. The pawn shop will determine the value of the item and tell you how much they will loan you. If you agree to the loan amount, you will sign the agreement and receive the cash you need that day.
Worst Case Scenario for a Payday Loan
In some states, a person is not legally allowed to have multiple payday loans at one time. In California, the maximum loan amount is $300. This is due to newer laws that prevent people from getting multiple loans at the same time as a means to cover the payments on their existing loans. In spite of these limits, there are many ways that payday loans can end up costing you a lot more than you expected.
There are no extensions on payday loans. Once payday rolls around, the full loan is due. It can be easy to forget your other financial obligations when you are in a bind. Putting the payment into the future by two or three weeks will give you the false security that you will come up with the money in time.
When you fail to pick up your check, the payday loan company will take it to your bank to collect. If the money is there, they will withdraw the full amount. When the money isn’t there, the bank will charge $30 to $50 in overdraft fees. If they continue to deposit the check every day until they hit pay dirt (literally!), overdraft fees could quickly add up into the hundreds.
The payday loan company will contact your references to try and contact you. Although the law prevents them from revealing the details of your agreement, it isn’t unusual for companies to break this rule. Their only goal is to find you quickly and get the money you owe.
When you don’t pay your payday loan, you could easily end up in court. When you make a binding agreement and fail to abide by it, the payday loan company will almost always win. They can have the court garnish your wages until they are compensated for the full amount of the loan. If they have permission to sweep your bank account and the total amount you owe isn’t there, you could add even more fees to the total. Some people have actually ended up in bankruptcy because they were unable to pay back a $300 payday loan.
There is also your credit score to consider. Overdraft charges, unpaid loans, and court cases can all lead to a much lower credit rating. If you end up in bankruptcy, it will stay with you for years. Getting a pawn loan will never have a negative impact on your credit rating or result in overdraft fees at the bank.
Now that there is more regulation, payday loan companies are on the decline. On the flip side, pawn shops continue to grow in popularity as a place to get fast cash and great buys. One change that has driven this popularity is the option to buy online. This helps pawn shops build a much larger customer base and it gives them more money to invest in local loans.
Worst Case Scenario for a Pawn Loan
If you are unable to meet your original loan payment date and if you run out of renewables, you could lose the item that you pawned. Period.
Granted, some people take pawning to the extremes and end up with extensive loan debts for items they don’t want to lose. The best approach is to only pawn things that you can afford to lose or that you don’t mind living without. Be realistic about your ability to pay back any loan in a reasonable amount of time. It’s a lot easier to risk losing something you don’t want or need any more than it is to gamble with the family heirlooms.
Pawn Loans VS Payday Loans: Why the Choice in Pawn Shops Matters
A pawn shop loan can offer a number of advantages over payday loans, but only if you choose the right one. Avoid new businesses and look for an established pawn shop with a good reputation. A reputable pawn shop that operates as a legitimate business in the neighborhood will provide customers with fair, trustworthy dealings that they can feel good about.
One way to assess a pawn shop is by the quality of items they offer for sale. If you can’t trust them to sell good quality products, you may not be able to trust them to give you a fair deal. Of course, the responsibility is yours once you make the loan agreement. Payday loan companies determine how much you can reasonably afford to pay back. Pawn shops assess what an item is worth and set the maximum loan based on that value. The rest is up to you.
Auto Title Loans
Auto title loans work in much the same way as a payday loan except that it uses collateral. When you present your car title to the lender, they will loan you from 25% to 50% of the value of your vehicle. Most lenders also request you to leave your keys.
Some of the features that appeal to borrowers include increased borrowing limits and no need for proof of employment or income. People who receive money through a government program or have an annuity settlement may have difficulty getting other types of short-term loans.
The danger in these loans is that they can be for as much as $10,000 and they carry a high-interest rate. The reality is that most people who are in need of fast cash are not going to have the money they need to repay the loan. Even a loan of $500 will come at a cost of $625 or more to repay.
These loans are typically for a fifteen to thirty-day term. When you fail to show up with the money to repay your loan, the lender has the option to repossess your vehicle.
In many cases, the companies that offer them prefer when you don’t pay so that they can collect more money for penalties and fees. Some lenders offer to “roll over” the loan into a new one that will also add fees and interest to the existing balance. You may pay what you have available and then “refinance” the remaining balance. This allows the lender to continue to collect more money from you before repossessing your vehicle.
No one who has their vehicle repossessed at the end of an auto title loan ever comes out ahead. They lose their transportation to get to work and any other place they need to go. If you need fast money without the risk, consider a pawn loan.
Now that you have an idea of the features that set apart pawn loans vs payday loans, you know where to turn for the fast cash you need. Contact Monte De Piedad today for the best rates, longer times, and fair prices you need.