People borrow money for a number of reasons. For example, loans are helpful for financing the purchase of homes or cars, but also for large unexpected expenses such as medical procedures, honeymoons or even to repay other debt. Similarly, people can choose a wide range of borrowing options. While the total amount of pawnshop loans is down from its peak in 2012, there has been a steady rise in the amount lent by pawnbrokers in the past 5 years. This raises the question: are pawnshop loans really a good borrowing option for consumers?
Cost Comparison: Expensive Borrowing Option
Pawnshops tend to offer loans with monthly interest rates of about 1.5% (19% p.a.). In isolation, it's hard to know if this rate affordable and it might even seem low. For a better perspective, credit cards typically charge about 2% monthly interest (25-30% p.a.) and personal loans usually charge about 1% monthly (12% p.a.). However, the cheapest personal loans charge much less, at about 0.5-0.7% per month (7-9% p.a.). This means that borrowers will end up paying 2 to 3 times more in interest from a pawnshop compared to one of Singapore's top personal lenders.
Pawning vs. Selling Items
While personal loans from banks tend to be much more affordable compared to those offered by pawnbrokers, it can be difficult for some individuals to obtain competitive loan offerings. This is often true for foreigners and those with poor credit scores. Therefore, individuals that own any valuable items tend to gravitate towards pawnshop loans. This may not be as rational as it appears. For instance, pawnshops typically offer borrowers 60-80% of the value of the pledge (e.g. jewelry, gold, etc.) and charge interest on top of the loan amount. In contrast, borrowers may be able to sell items for amounts closer to the items' true value and avoid the borrowing cost altogether by selling their goods on sites such as Ebay or Carousell.
Best Ways to Borrow to Repay Existing Debt
Others still, consider pawnbroker loans as a tool for repaying their existing debts. While repaying one's debt is an admirable goal, there are much more cost effective methods than pawning valuables. For example, balance transfer loans offer interest-free periods of 3 to 18 months, before borrowers start accruing any interest at all. Borrowers seeking a long-term loan for repaying debt should choose a debt consolidation loan instead, as they charge lower interest rates (8-9% p.a.) over several years than balance transfers, which charge 25-30% p.a. following the interest-free period.
How to Avoid Money Lending Scams
Unfortunately for the less financially savvy, loan scams are becoming more prevalent in Singapore. For example, the Singapore Police Force reported that the number of loan scams more than doubled from 396 in 2017 to 994 in 2018, making it the second most common type of scam in the country. Therefore, we strongly recommend that prospective borrowers review any loan offers with a critical eye.
For those considering pawnshop loans, there are few ways to avoid a scam. First, the Ministry of Law's website makes it possible to ensure that your preferred lender is licensed with the government. Second, pawnbrokers can only charge up to 1.5% in monthly interest charges. Pawnshops charging more than this rate are not the most affordable options and may be operating scams. Additionally, lenders are not allowed to send advertisements via SMS messages. Therefore, it is best to avoid SMS loan solicitations altogether.
Individual Research is Crucial As Each Borrower's Needs Vary
Borrowers in Singapore are increasingly turning to pawnshop loans. For some, this type of borrowing represents an unfortunate, but necessary, type of financing. However, for many others, pawnbroker loans are a relatively expensive alternative to the other types of loans available. The best way to ensure that you find an affordable and legitimate loan is to conduct your own due diligence on the best loans available given your circumstances and preferences.