Payday Loans vs. Pawn Loans, What is the Difference?
When you’re up to your ass in alligators, it’s hard to remember that your objective was to drain the swamp!
When you’re up against a big stack of unpaid bills and the collectors are all over you, it’s hard to focus on a personal financial plan that can put you back on solid footing and in control of your expenses. Of course it would be better if we all had a household budget and a rainy day savings fund. But even the best plans don’t always work out the way we planned.
Unexpected expenses have a way of surprising us at the most inopportune times. They can ambush us when we are least prepared- like when unexpected medical expenses happen at the same time the car breaks down.
It’s hard NOT to get overwhelmed when faced with the stress of not being able to keep up with things. But before considering a payday loan or a pawn loan, here is a checklist of possible solutions to your financial emergency.
- Ask your creditors for more time to make the payments
- Take a cash advance on a credit card if you have any credit available
- Ask your employer for an advance
- Borrow money from a relative
- Use the overdraft feature of your checking account
- Sell an asset that you no longer need
Payday loans and pawn loans are for people who have short term cash emergencies and don’t have other good options.
What is the difference between payday loans and pawn loans?
- Both are small loans that don’t require a credit check. That makes them readily available to people who have credit problems.
- They have short terms and must be paid back quickly, usually within a month.
- They are marketed as a fast way to access emergency money because people receive the cash in usually one day or less.
- Both loans are usually priced at a fixed dollar fee, which represents the finance charge to the borrower. Because the loans have such short terms, the cost of borrowing is very high.
- In the case of the payday loan, the borrower usually provides the lender with a pre-dated check or debit authorization.
- In the case of a pawn loan, the borrower gives the lender an asset as collateral.
Who can get a payday loan?
Anyone with a checking account and a steady income can obtain a payday loan.
Who can get a pawn loan?
Anyone who owns a valuable asset that can be used as collateral.
The most important difference between a payday loan and a pawn loan is what happens if the borrower is unable to repay it on time.
If a pawn loan is not paid when it is due, the customer forfeits the pawned item and that is the end of it. If a payday loan is not paid on time, it can lead a borrower into a debt spiral they can’t escape.
A payday borrower, who is unable to close out the loan when it is due, is subject to additional fees and a renewal of the loan for another term. Over time, those fees can pile up and result in owing huge amounts, which are all related to the original small loan amount. Often, payday borrowers will go down the street to another lender and take another loan to pay off the first one. The result can be to trash the financial health of the borrower and create a mess that can take years to clean up.
People who have assets have options. And one of those options is a pawn loan. If someone wants the opportunity to get their asset back once the cash emergency is resolved, then a pawn loan is the best choice. The finance charge is roughly the same as a payday loan, but there is no risk of spiraling out of control if, for whatever reason, the loan can’t be paid off on time.
Post by Don BattisDon Battis
is the CEO of Pawntique.