A lot of people have asked how pawn shop loans affect your credit, whether they help it, hurt it, or do anything to it at all? Get the answer in this post.
In the pawn industry, occasionally we will get the random question regarding someone’s credit score or credit history in regard to pawn loans.
One of those questions that I will get is “Do pawn shop loans help improve your credit score?”
The answer is, as long as the loan we are talking about is a pawn loan, then no, they will not affect your credit.
That means that they won’t improve your credit score.
On the other hand, if you default on the loan and are unable to pay it back in a timely fashion, it also won’t hurt your credit score either.
There’s a variety of reasons for that, but really it all boils down to the fact that pawn shop loans are known as “Secured loans.”
Now, if you are unfamiliar with pawn loans overall, let me quickly explain how this all works so that you understand what we are talking about here.
A pawn shop loan is known simply as a “Pawn loan.”
A pawn loan is a loan that you are given based on merchandise, or collateral, that you bring in with you when you go to the pawn shop.
The pawnbroker (a person who runs a pawn shop) will evaluate the item and determine what they can loan you against it.
You can come back at a later point in time and repay the loan, plus some interest, and get your items back.
One of the questions that I’m often asked is “Do pawn shops loans help improve your credit score?” Fortunately, the answer is no. I say fortunately because if pawn shops made loans based on your credit history, it would eliminate a huge part of the customer base and people in financial need that pawn shops help. Pawn shops exist to help those that standard financial institutions turns away.
What Happens If You Default On The Loan Is Why A Pawn Loan Is Considered A “Secured Loan”
If you are unable to pay the loan back on time, you will end up losing, or forfeiting, the items that you made the loan based on.
When you forfeit the items on loan, the pawn shop keeps them and resells them to get their money back from the loan they made you.
Because the pawn loan is then considered “Repaid in full” it is also considered a no-recourse loan.
What Is A No-Recourse Loan
What that means is that the pawn shop can’t come after you at a later point in time to try to get money out of you.
They can’t sue you to try to collect the amount you borrowed.
Additionally, they don’t file any documents with the credit bureaus based on you defaulting on the loan.
That having been said, if you repay the loan in full on time, they also don’t report that.
Why Not Dealing With Your Credit Is So Important To People That Pawn Shops Help
You have to understand that not everyone has great, or even good credit.
In fact, there are many people with horrible credit and that don’t even have bank accounts.
Banks and other standard financial institutions won’t work with these people when they need access to emergency funds to cover an unexpected expense, pay a bill, or avoid a utility shut off.
Their credit scores would percent the banks from making any kind of loan to them, even for $5, not that a bank would be interested in making such a small loan to begin with.
However, pawn shops exist to help people in these very circumstances.
Just because someone doesn’t have the world’s best credit score doesn’t make them a bad person.
It also doesn’t mean that they shouldn’t have some kind of access to emergency money when they really need it.
With Pawn Shops, Your Possessions Are Your Credit
Pawn shops don’t check credit scores or look for bank account histories.
They don’t care about that sort of thing. All pawn shops care about is what you’ve brought in with you and how much they feel they would be able to resell it for should you have to forfeit it.
When they are making you a loan, they are basing it on the collateral that you’ve brought with you and nothing else.
When you sign that loan agreement, you aren’t signing away your credit score, or even putting it on the line.
All you are doing is saying that the pawn shop can hang onto these items and when you’re able to afford it, you will come back and get them.
If you can’t afford it in a pre-determined time, the pawn shop keeps them.
That’s all there is to it, and should you find yourself in need to emergency money but without the credit needed by regular lenders, be thankful that pawn shops don’t look at your credit report or report to the bureaus about your activity.
Mandy Dormain started working for Pawn Nerd in 2020. Mandy grew up in a small town in northern Tennessee. But moved to New York for university. Before joining Pawn Nerd, Mandy briefly worked as a freelance journalist for several radio stations. She covers politics and economy stories.