Pawn Loans vs. Payday Loans

A common question we get at Windy City Jewelry & Loan is “What is the difference between pawn loans and payday loans?” These two types of loans are certainly not the same, and we want to make sure customers understand the differences.

Pawn loans are cash loans given against a collateral item of value. A range of items can be pawned, including jewelry, electronics, musical instruments, coins, bicycles & more. When you pawn merchandise, the value of your item determines your cash loan amount. The lender will establish an amount of time you have to repay the loan, and you get your item back upon repayment.

Payday loans don’t involve collateral and are based on a specific amount determined by your usual earnings. Payday loans are generally high-interest loans which must be repaid within a short amount of time. Typically, this type of loan is made against the borrower’s next paycheck in lieu of involving collateral.

The major differences between pawn loans and payday loans:

Impact on Credit Score

Pawn loans don’t impact your credit score, so you don’t have to worry about doing long-term financial damage if you fail to repay your loan. However, defaulting on your pawn loan would result in losing the item you provided as collateral, which becomes property of the pawn shop. Your personal credit is not involved in a pawn loan, so you don’t have to provide your credit information in order to obtain the loan.

Payday loans are more complicated because they don’t involve physical collateral. Instead, the loan is given against a post-dated check. At the end of the loan period, the lender cashes your post-dated check. If your check doesn’t clear, then you default on the loan. Defaulting on the loan could result in overdraft fees in addition to the amount you owe to repay the loan. Additionally, the debt may be sold to a collection agency, which can cause serious harm to your credit score. If a collection agency acquires your debt, then a notice will go out to each of the three credit bureaus. Even though many payday loans don’t require a credit check, an unpaid loan can still damage your credit score. Even worse, lenders can file lawsuits for unpaid debt that could appear as a public record on your credit report.

Interest Rates

Pawn loans have much lower interest rates than other cash loans. Interest rates on pawn loans are highly regulated in some states, including Illinois. A formula based on the loan amount, collateral item, risk and recourse determine the interest rate. Using a specific formula to calculate interest rates means you don’t have to fear hidden charges on a pawn loan. If you’re unable to pay back your pawn loan within the agreed time, a couple of things could happen. Some lenders will consider it a loan default and take the merchandise you put up as collateral. However, Windy City Jewelry and Loan works with customers to re-negotiate loan terms to alter the pay period’s length without altering the interest rates.

Payday Loans often have higher interest rates than pawn loans. This is true not just in the event of defaulting, but also at the onset of the loan. Defaulting on a payday loan or extending the pay period can lead to even higher interest rates on your loan. It’s not uncommon for payday loan borrowers to find themselves paying off increasingly high interest amounts period after period. There are fewer regulations on payday loans, and interest rates vary from lender to lender. Depending on who you borrow from, you could see interest rates of three or four digits.

Pay Periods

Pawn Loans often give the borrower more time to repay the loan. Loan pay periods vary in length and are typically agreed upon by the borrower and lender at the start of the loan. Depending on the lender, there may be some flexibility with the pay period. Numerous factors affect the pay period length, including the loan amount and the borrower’s history with the lender. Some pawn loans allow pay periods of one or two months. Furthermore, pay period extensions are sometimes possible if the borrower is responsible and proactive with their request.

Payday loans don’t always allow for such flexibility, at least not without additional cost. Payday loans are generally made against the borrower’s next paycheck, and require a post-dated check to be provided at the onset of the loan. At the end of the pay period, the lender cashes the check. In the event that you need more time, you can request an extension. However, a loan extension typically leads to higher interest rates (but higher rates are probably still preferable to defaulting on the loan and potentially hurting your credit score).

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