The Lowdown On Pawnbroking

The credit crunch might spell bad news for consumers and banks but not everyone is doing badly out of the downturn: Pawnbrokers are boasting an increase in business.

According to the National Pawnbrokers Association there are now 800 pawnbrokers in the UK, with new outlets growing at a rate of 10% a year. You might recognise some of them - such as Cash Generators, The Money Shop and Cash Converters - from stores you see on the high street.

How does pawn broking work?

Pawn broking basically works like this: You go to a pawn broker for a loan, but you will have to leave something valuable - the `pawn' - as security. You'll have to sign a credit agreement and the pawnbroker will also give you a pawn receipt which you keep to prove you own the item. Because the pawn broker has something of yours as security it doesn't need to do any credit checks.

You pay interest on the loan - much more than you'd pay than if you borrowed money from a bank or building society - and risk losing your property if you can't repay the money. Once you've repaid the loan you get your stuff back.

If you don't repay the loan after a pre-determined period of time, and don't re-negotiate with the pawn broker, they can sell your item to recover the cash.

Pawn broking is regulated under the 1974 Consumer Credit Act and there are strict measures in place to ensure goods can't be sold off before customers have had a chance to repay the loan.

Traditionally pawn brokers have targeted people with a poor credit rating, or without a bank account, who find it difficult or impossible to borrow money elsewhere. But the credit crunch means it's becoming more popular with more people as banks and other lenders get more picky about who they lend to.

'Pros' of pawn broking

Supporters of pawning argue that the interest rate isn't that relevant as it's supposed to be for people who can pay the money back pretty soon, usually between one and six months. However, the interest rates are so high, that even after three months, you could end up paying a sizeablee sum in interest.

Speed is another factor - there are no long forms to fill in and you will receive your money on the same day. There are also no credit checks to do and if you're late repaying the loan it won't affect your credit score (although you could lose the item you left as security).

Disadvantages of pawn broking

The most negative thing about pawn broking is the very high interest rate. If you take a long time to pay the loan back, the interest you'll pay will make it a very expensive way to borrow. One online pawnbroker charges an APR of 84% for some loans! Others charge much more.

You'd be better off getting a personal loan or credit card instead. Even if you borrow for just three months from a pawnbroker, you'd end up paying 19% interest if the monthly rate was 6%.

If a weak credit rating means you can't get a mass-market card or loan, there are `low credit score' credit cards where you'll pay a 30% + interest rate. That's still very high, but better than the pawn broker..

Another important point to consider is that if you can't manage to repay the loan you stand to lose the item you left as security - so think carefully about how much the items mean to you before handing them over.

Also you won't be able to borrow up to the full value of the item you leave. So if your item is worth £100, you might only be able to borrow £50, or less.

Dealing with debt

If you're seriously considering pawnbroking, you may be in deep financial trouble.

Before going to a pawnbroker, consider some other options first:

- Talk to your creditors. You may find that banks are willing to agree a debt management plan where, for example, your monthly repayments might be reduced.

- Get advice from charities such as Citizens Advice or National Debtline. They can give you solid advice to help you get on top of your debt.

- You could also get good advice from fellow Fools on out Dealing With Debt discussion board.

There's almost certainly a better answer than the pawnbroker.

More: Seven Tips To Seriously Reduce Your Debts