In the rise of expensive pawn loans – and affordable alternatives
If money is tight, you may have thought about pawning an item of value.
It might be jewelry, a watch, or a handbag.
The cost-of-living crisis has led to a boom in pawn shops – where money is given in exchange for a valuable item that can be sold if repayment is not made.
But experts warn that borrowing is expensive, and if you can’t service the debt, you could lose a possession of sentimental value.
This week, Sun Money examines these loans and offers advice on affordable alternatives.
YOU could end up paying back hundreds of pounds in interest. Three of the UK’s largest pawnbrokers, Cash Converters, Ramsdens and H&T, charge between 118.8% and 119.9% per annum.
This means that if you took out a loan of £500 over six months, you would have to pay back £299 in interest or £799 in total at an interest rate of 119.9 per cent.
The loans are far more expensive than those from high street banks but cheaper than payday loans.
Many will list a monthly or daily interest rate, but they should also list the annual interest rate.
Often you can only borrow a percentage of an item. For example, if your ring was worth £200, you may only be able to borrow £100. Sometimes you have to repay the loan in a single installment.
An H&T spokesman said: “We serve customers who cannot raise funds in the traditional bank lending system or who need a short-term, low-value loan to meet an immediate financing need.”
Pawnshops do not carry out any credit checks. This can be an advantage if you have bad credit, but it means there are no guarantees to ensure you can afford the loan.
Debt Camel debt adviser Sara Williams said: “Some people find that they’re cashing in on an item but are left with so little money that they’re forced to pawn it back in a couple of weeks.
“A one-time convenience can turn into a long-term nightmare, especially when you’re pawning jewelry with sentimental value.”
A spokesman for the Financial Conduct Authority said: “We reformed the market to help borrowers avoid spiraling into debt and made it clear to lenders that they have to support customers when they’re struggling.
“We will take action when companies fail to meet their commitments.”
IF YOU DO NOT PAY BACK THE LOAN
If you pay back on time, you can get the pledged item back. But you must keep the receipt.
If you lose it and the item costs more than £75 you will have to pay a fee to get a judge or oath commissioner to swear the goods are yours. If you cannot repay the loan, the item will be sold.
Fairer Finance’s James Daley said: “Avoid pawning items of high sentimental value unless you are confident in your ability to repay.”
If your item is resold, you should receive additional money given to the pawnbroker – above what you were offered for it.
James adds: “In the past, pawnbrokers have been bad at reuniting customers with that extra money.
“So if you pawn something and it gets resold, check what it was sold for and chase the money you’re owed.”
If you need to borrow money, look at alternative options. Remember that emergency loans should only be used in extreme circumstances such as: B. to pay a priority bill or if your car breaks down.
If you’re on a low income or have bad credit, you may struggle to qualify for the best lending rates on the high street. Therefore, affordable alternatives are important.
First, try to get free money in the form of grants. If you receive benefits, talk to your work coach about the Home Support Fund. Or ask your municipal administration if they can help you.
Or MoneyAdviceTrust’s Jane Tully suggests: “Credit unions often offer a range of affordable products at cheaper prices, and there is a cap on the amount of interest they can charge.”
If you’re having trouble paying a bill, contact your provider.
Use Turn2Us to search for grants, or speak to End Furniture Poverty if you need furniture or a new fridge freezer, for example.
Responsible lenders like Fair For You offer lower-cost loans to help purchase household items. Iceland is giving out £75 of interest-free microcredit in the form of a pre-loaded card to spend in supermarkets.
You can get free debt advice from Citizens Advice, StepChange or National Debtline.