What is collateral?
Collateral is something you own — such as jewelry, electronics or a musical instrument — that a lender uses to secure a loan. If you default on your loan, the lender can take ownership of your collateral and even sell it.
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Pawn loans vs. short-term loans: What you need to know
Don't settle on a loan until you know the facts.
Life doesn’t always allow for perfect financial health. When you need cash to get you through to your next payday, a pawn loan or short-term loan could be a viable option.
Both types of loans are fairly easy to get — they usually don’t require stringent credit checks. However, they can cost you a lot in fees and interest.
Let’s take a look at both pawn loans and short-term loans so you can decide which is right for you.
Pawn loans vs. short-term loans: How they work
Pawn loans
A pawn loan is a secured loan, meaning you put up an item of value as collateral for the loan, usually items like jewelry or electronics. The amount of the loan will vary based on state regulations and the collateral you pawn.
The loan you’re approved for will be a percentage of the item’s value after the lender accounts for storage, security and other costs. Repayment terms are typically from 30 days to a couple of months. If you default on the loan, you risk the item being sold to cover the balance.
Short-term loans
Short-term loans are small-dollar loans offered in stores or online that must be paid off at the end of the term. For in-store loans, you typically receive your funds immediately after writing a postdated check for the amount of the loan. For online loans, you typically receive funds by bank transfer one business day after your approval. You pay back the loan via direct debit on the due date.
For both loans, applications can take about 10 minutes online, with some lenders offering instant approval. While good credit is not a requirement, you do need to prove that you’re able to pay back the loan.
A selection of short-term loans you can apply for
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Which loan offers an easier application process?
Pawn loans
The application and approval process for a pawn loan is simple. First, take in an item of value to be appraised. Once the lender has determined its worth, you’ll present government-issued ID and complete any paperwork.
Short-term loans
While pawn loans can only be done in person, short-term loans are accessible online. They require you to complete basic information about yourself and provide proof of income.
Bottom line
Both loans offer a fairly easy application process, but only short-term loans can be done both online and in person. Pawn loans don’t require proof of how you’ll repay the loan.
Which loan offers faster turnaround?
Pawn loans
It takes about 10 minutes to receive a pawn loan, depending on how long the appraisal takes. There is no credit check to wait for, so once you’re given an amount and agree to the repayment terms, you can leave the store with cash in hand.
Short-term loans
Short-term loans generally take five to 10 minutes to apply for, and approval can be instant. Unlike a pawn loan, you must meet eligibility requirements that include your ability to repay the loan. You can walk out of the store with cash, whereas online your funds typically arrive in your account the next business day.
Bottom line
Because you’re able to walk out with money in your hands the day you apply, pawn loans can be your quickest option.
Which loan offers better interest rates?
Pawn loans
The interest rates and finance charges for pawn loans are typically between 5% and 25%. If you’re unable to pay back the loan, you may be able to get an extension, if your state allows it, but loan extensions come with additional costs.
Short-term loans
Short-term loans have higher associated costs. Interest is charged in the form of fees and can be anywhere from $10 to $30 for every $100 borrowed. Some states have imposed regulations on a loan’s maximum APR allowed. In other states, you may see upwards of 1,200% APR. If you fail to pay off your loan and need to refinance the remaining balance, you may pay further fees and charges. Refinancing could negatively affect your credit.
Bottom line
Pawn loans may offer lower rates, but these lower rates come with a risk of losing your collateral if you default on the loan.
Which loan offers more options?
Pawn loans
Pawn loans don’t come with a lot of options. Any variance in a pawn loan’s amount is based on the value of what you use as collateral. This collateral is usually appraised at $150 or less. While some pawn shops offer auto title loans, not all do.
Short-term loans
Short-term loans are typically given for small-dollar amounts, usually under $1,000. However, depending on the lender, they can be for larger amounts up to $5,000.
Some short-term lenders even provide other loan services, such as installment loans and title loans.
Bottom line
Pawn loans are limited by the items used for collateral. Short-term loans can offer a wider variety of loans.
Case study: $100 to get through the next two weeks
Reed needed to pay off an unexpected car repair. Unfortunately, he spent most of his money on groceries just before his car broke down. Luckily, Reed had a Nintendo Switch he received as a birthday gift that he could use as collateral for a pawn loan. He compared the options offered by his local pawn shop with an online short-term lender.
| Pawn loan | Short-term loan | |
|---|---|---|
| Loan amount | $100 | $100 |
| Loan term | 30 days | 14 days |
| Finance fee | $10 | $15 |
| Total due | $110 | $115 |
In this case, the pawn store loan offered a better deal for Reed. Though he would be without his Nintendo for a few weeks, he’d be able to pay back the loan early without any penalties.
Which loan has the option to be renewed?
Pawn loans
Most pawn shops allow you to renew a pawn loan by paying the lending fee from the first loan. Then the loan typically begins again for the same amount of time with the same terms and conditions.
Short-term loans
Some lenders allow you to “roll over” your loan so that it can be extended. While you may not have to repay it, your fees will continue to accumulate. The number of times you can renew a short-term loan varies by state regulations, so make sure to check out your state’s laws before taking out a short-term loan you may not be able to pay back.
Bottom line
Both pawn loans and short-term loans are able to be renewed, but you should think hard before taking out a loan you may not be able to pay back on time. It’s easy to fall into a loan debt cycle where you take out another loan to pay for the one you just had — and then end up trapped in this never-ending series of loans.
Trapped in a cycle of payday loan debt? Here’s how to dig yourself out
Bottom line: Which option should you pick?
Both pawn loans and short-term loans can get you cash in a pinch, but each can be filled with financial risk. And neither are long-term solutions. If you’re looking for quick cash and have something of value, a pawn loan may be faster and more cost-effective. Of course, fees will depend on the state you live in and the lender you use.
If you’re in a cash emergency, it may be a good idea to explore different options before settling on a pawn loan or short-term loan.
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Frequently asked questions
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Compare payday loans in your state
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