Few people understand the full workings of the loans pawn shops offer. We all know the basic deal: You bring something of value to the shop, and leave it there as collateral for a short-term loan. If you pay back the loan, plus interest, on time, you’ll get your item back. If not, the shop will keep the item and sell it.
The problem with pawn shop loans is that the rates they charge usually add up to annual percentage rates of 120 to 300 percent. Since your possession is securing the loan and all of that potential interest, you’ll be loaned far less than your item is worth. Worst of all, you may very well lose your item. If you have something of value that you’re willing to part with, you’ll do much better selling it outright through eBay, Craigslist, or a dealer who specializes in that type of object (antiques, jewelry, musical instruments, etc.).
Car Title Loans
These are short-term loans, similar to payday loans, but using your car’s title as collateral. Like payday loans, car title loans usually have very high interest rates, as much as 25 percent per month, which comes to 300 percent (three times the amount of the loan) per year. Worst of all, if you can’t make your payments, the lender can take your car without having to go to court first. Again, if you need money for a short period of time, even adding to high-interest credit card debt is a better option.
This is the type of deal where you pay a monthly rental fee for an item, and a portion of your rental payments goes towards the purchase price. If you continue to rent for a long enough time, you will own the item outright. Rent-to-own plans work well for parents of children who are learning to play an instrument. If the child loses interest or switches to a different instrument, the parents are out far less money than they would be if they had bought the instrument outright.
For most other situations, though, renting to own is a bad idea. You can rent to own furniture, electronics, and even boats and RVs, but you’ll end up paying far more than the value of the item. For furniture or electronics, it’s much better to buy the item used, or to save your money until you can afford to pay the entire purchase price at once. For vehicles, standard vehicle loans will give you much better rates.
If you aren’t sure about whether a loan is right for you, or have been caught off guard by a predatory loan, reach out to us today to find out what you can do.