Is A Pawn Shop Loan A Good Alternative To A Personal Loan?

You might be stuck in a pickle. You need a meaningful amount of cash for an emergency, but banks won’t lend you money and credit card debt and money lenders are too expensive. You need to find a way to get cash quickly and without risking a financial ruin. If you are in such a situation, you may have considered going to a pawn shop.

Pawn shops are relatively common in Singapore, with 277 licensed ones here as of July 2024. These actually may not be a bad option for you, as long as you either don’t care about losing your valuable item or if you can comfortably pay your money back within six months. Here, we examine various aspects of dealing with pawnbrokers in Singapore to help you assess if it’s the right option for you.

Temporarily Exchanging Your Valuable for a Loan

Pawn shops are very easy to work with. First, you take one or more of your valuable items to a shop. The broker there will evaluate your product, and provide you a loan. For example, if you bring a S$15,000 watch, they might value it around S$10,000 and provide you with a loan of S$10,000. Usually you can expect to receive 60-80% of the fall value of the pledge (i.e. your watch) as a loan from a pawn shop.

It’s important to remember that you are borrowing from a pawn shop, not selling to them (though you could sell to them if you choose). Typically, you are given six months to pay your money back. Each time you make a partial payment, your six months reset. It’s only when you don’t pay your money back that you lose your valuable forever. In this case, the pawn shop will auction off your watch to recover their loan.

Average Cost of Pawn Shops in Singapore

Loans from pawn shops in Singapore are actually quite cheap. It seems that rapid growth of pawn shops in Singapore has led to heated competition among them. In order to attract more customers, they have been lowering interest rates and giving higher value to their customers’ belongings. They typically only charge 1% to 1.5% per month, which is even lower than ~2% charged monthly by credit cards. Currently, the biggest players in Singapore are Maxi-Cash, Cash Mart, ValueMax and MoneyMax.

Easy Access to Money

Pawnbroker loans present an interesting alternative to going to a bank or licensed money lender for a personal loan. You don’t need a proof of identity or income to get a loan from a pawnbroker. All you need is a valuable item that you can provide as a collateral to the lender. Pawnbrokers will then lend you money quite easily because they can make some money by selling your valuable(s) even if you run away with the money.

Not only that, while banks will take a few days to approve your loan, pawn shops will pretty much give you cash upfront when you bring in your pledge.

Other Notable Features

In some cases, if your item gets sold in an auction for more than what you owe to the broker, then you can even receive the surplus amount. For example, let’s say you still owe the pawn shop S$11,000 with interest and fees. If the watch gets auctioned off for S$12,000, you can make S$1,000. While this is better than losing your watch completely, we don’t advise you to do this. If anything, you could have made more money by selling the watch on eBay on your own, thereby avoiding the interest and fees you would have paid to the pawn shop. Not only that, you could probably even sell the item for a higher price, as pawnbrokers are incentivised to make the sale as quickly as possible.

Pawnbroker Loans vs Personal Loans

While pawn shops are not as bad as you might think, a personal loan from a bank is still the cheaper option. Most banks will charge you about 1% per month of effective interest on your personal loan compared to the 1.5% charged by pawnbrokers. Also, with banks, you don’t have to worry about losing your valuables, because personal loans are unsecured loans, meaning you don’t have to put up a collateral to borrow money.

However, if you don’t have the credit rating or annual income to be approved by a bank (or for a credit card), a pawn shop might not be a bad idea, especially compared to more expensive options like licensed money lenders that can charge up to 4% per month. Just make sure that you are either comfortable with parting with your jewellery or bag, or that you can definitely make the full payment in six months to get your money back.

Alternatives to Bank Loans

Many individuals resort to pawnbroker loans because they have bad credit, low salaries or are otherwise unable to qualify for a loan from banks. However, there are other options besides pawn shop loans for these individuals. Check out our roundup of the best personal loans in the market today.

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