Benefits to Pawning v. Taking out a Loan

Pawning is the act of trading collateral for the time-specific use of a certain amount of money. It parallels the traditional loan process, but there are key differences that make pawning the better solution for borrowing money. Being comprised of both a loan-processing department and a resale floor, pawn shops make money from collecting interest and reselling defaulted collateral for an inflated profit. They excel by making small loans accessible to more people.

The Collateral Difference

The most significant difference between the pawning and loan process is the required guarantee. While loaners rely on a person's credit history to decide the amount and terms of the loan, pawn lords rely on the perceived quality of the items, usually jewelry or electronics, offered for collateral. This is significant because it allows people with less than perfect credit to receive loans. It also ensures a faster approval process while allowing both parties to negotiate the terms.

The Defaulting Process

Defaulting on a pawned loan results in much less severe consequences than of a traditional loan for several reasons. Pawn shops are required to take various, time-consuming steps to notify the owner. There is a government-mandated grace period, most commonly of 15 days, before the pawn shop can take ownership of the collateral. Pawn shops offer more flexible terms for reinstating and extending the loan. Also, if the items do finally become the property of the pawn shops, they are simply moved to the sale floor for resale. The original owner has the opportunity to buy it back, at least until it is sold to someone else.

Pawning is different from taking out a traditional loan in many ways. It is the more flexible, confidential and accessible way to borrow money. Many people believe that it is an easier method of financial investment.