Regardless of what you borrow against, borrowing from a pawn broker is nearly always a dumb idea.
Borro.com, the online pawnbroker, says that people are using gold to take out ever larger loans.
Back in January 2010, the average loan secured against gold at borro.com was for £2,000. In the first half of 2012, that figure soared to £7,000.
Here are the five highest value gold collections in the borro vaults:
|
Item(s) |
Loan value |
|
Two fine gold bars (1 kg each) |
£50,000 |
|
19 Asian gold bangles; one Asian gold bracelet, seven Asian gold rings, three Asian gold pendants, 12 Asian gold necklaces |
£40,000 |
|
Collection of 22ct gold jewellery |
£40,000 |
|
Collection of 18ct and 22ct gold |
£25,500 |
|
Eight large gold necklaces and 16 small gold necklaces |
£19,250 |
Now you might think it’s good that some people are able to borrow so much money thanks to the high gold price. Trouble is, pawnbroker loans are very expensive, so I don’t see borro’s figures as good news at all.
Before I explain why I think that, let’s take a look at how pawnbroking works.
How pawnbroking works
You borrow an amount from a pawn broker and in return you leave something valuable – the ‘pawn’ – as security. Because the pawn broker has something of yours as security, it doesn’t need to do any credit checks and can lend to you immediately.
You pay interest on the loan – much more than you’d pay than if you borrowed 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 property back.
If you don’t repay the loan after a pre-determined period of time, and don’t renegotiate with the pawn broker, the broker can then sell your item to recover the cash. The proceeds of the sale will go towards paying off the debt, the unpaid interest and any costs incurred in selling the item. You’ll then receive the surplus if there is any.
Loans normally last somewhere between one and six months.
Interest
As I’ve already said, the big problem with pawnbroking is the cost. Let’s look at borro.com’s rates:
|
Loan amount |
Monthly interest |
APR equivalent |
|
£100,000 + |
2.99% |
39.1% |
|
£20,000 to £99,999 |
3.99% |
53.6% |
|
Up to £19,999 |
4.99% |
68.8% |
So if you borrowed £1,000 from Borro for six months, you’d end up paying £339 in interest. I think that’s a heck of a lot for such a short-term loan.
Yes, the rates are much lower than for payday loans, but 68% is still a very high rate given that the risk of default for borro is close to zero. If you can’t repay the debt, borro can just sell whatever piece of property you deposited when you first took out the loan.
Alternatives
So what are the alternatives to pawn brokers?
Well, the best ways to borrow are via a 0% credit card or a personal loan. But if you have a weak credit score, you won’t be able to get either.
If you own your home, you might be able to raise money via remortgaging or take out a homeowner/secured loan. A major downside to this option is that you’re putting your home at risk, but you will at least be paying a much lower interest rate.
Or you could just go ahead and sell the item you’re planning to use as security for your pawn broker loan. True, if you sell it you don’t have any chance of getting it back, but you’ll only be able to get it back from the pawn broker by paying massive interest.
Personally, I think it’s simpler to bite the bullet and sell the item at the start. Then you can be sure you’ll realise the full value of your asset and not waste any cash on interest.
Perhaps the best option of all is not to borrow. I accept that’s easier said than done, but it may not be impossible.
Gold
So if you have some gold, I’d say that sending it off to borro.com or taking it to a high street pawnbroker is a pretty dumb thing to do. There are almost certainly better alternatives.
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