Pawning vs. Payday Loans - What are the Differences?

Here at Cuttings we offer a friendly and discreet Pawnbroking service where we try to accommodate everyone's financial needs.

So if you needed to raise some funds looking to expand your business, or just need a short term loan to take the kids on holiday but don't want to pay the hugely inflated interest rates, then pop into one of our branches where we hope you will be pleasantly surprised.

Whatever the reason for considering a short term loan, two solutions which are often compared alongside each other are the 'payday' loan and the pawn shop loan.

At face value, these loan solutions have many similarities: both are readily available to those needing extra cash, and both supply the funds to you immediately. But if you look a little further, you’ll find that there are also some considerable differences.

Obtaining the loan

The requirements for a payday loan are very different to a pawn shop loan. Short term loan companies usually require details of your financial situation before issuing a loan, whereas a pawn shop will ask for a valuable item you have chosen to use as collateral. A payday loan company will also charge admin/arrangement fees, but most pawnbrokers won’t, and we certainly don't.

The cost of the loan

The interest rate on payday loans is much higher than a pawn shop loan, because they do not have your assets as collateral. At Cuttings the Pawnbroker, to borrow £1,000-£5,000 will incur 4.99% interest – at least a quarter of the interest you’d expect to pay a short term lender. An in-store loan incurs a slightly higher interest percentage charged at 7%, however this is negotiable with loans of over £1000.

Flexibility

A payday loan company will often tell you that the loan is flexible, but if you were to extend the lending period they would charge you. They are not supposed to be for a long period of time, and if you miss a payment you’ll be charged a fee. Because the company have had access to your data, they may report a missed payment to credit reference agencies, which could affect your credit rating. Although pawn shop loans are also short term, you can easily extend the lending period, as long as you pay the interest to date.

If you cannot pay the loan back

This is probably where the biggest difference lies between the two lending options. If in the unlikely event you cannot repay the loan after the extended loan period, a pawnbroker will keep your assets. It is not in their interest to do so as they would like you to redeem your assets so that in the future you may perhaps again do business, and they will do all they can to help you repay the loan, but if this ends up being the case then there will be no further action taken against you.

However, if you cannot repay a payday loan company, the consequences are far more serious – and expensive. Simply visit one of these company’s websites and you’ll see that even the lenders themselves ask you to think carefully before taking out the loan, in case you cannot pay it back.

We recommend that if you have assets to pawn, this is the easier, safer option for short term borrowing. But if you need any more information about the process, please get in touch with a member of our friendly team.