When is a loan not a loan?
Paul Lewis explains what happens when you take Granny's ring to the pawnbrokers.
Pawn brokers have found a way to avoid stating the interest rate charged when the y provide people with money in exchange for valuables. Traditionally, pawnbroking is a simple transaction. You take the ring Granny left you to a pawnbroker who offers you a loan – typically of half its value, usually over six months. When you can repay the loan plus the interest, you go back to the shop and redeem the ring. All that time you own the ring – it is kept by the pawnbroker as a “pledge” that you will return and repay the loan. If you do not, then the pawnbroker will sell the item on your behalf. If the loan was for £75 or more and they sell the item for more than the amount you owe, they should refund any excess, after deducting reasonable costs of sale.
These transactions come under the credit rules of the Financial Conduct Authority (FCA). That means lengthy credit agreements, a lot of paperwork, and stating an APR – the Annual Percentage Rate – which can be compared with other forms of credit.
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Pawnbroker APRs are high. Interest is typically between 3% and 10% each month, but a FCA report in 2018 found the average APR is 120%. That is much more expensive than credit cards, which currently average 24.65% APR, though the cost is zero if you pay the bill in full on time. Average bank overdrafts are 38%. Only payday loans are generally more expensive than pawnbroking.
Some pawnbrokers now avoid stating these high APRs by using buyback agreements. With those, you sell them Granny’s ring with an agreement that you can buy it back within a set period – typically 28 days – for the same price plus a fee. This is not a loan so no APR is shown. But the cost may end up higher. At the end of the period the item will be sold and the pawnbroker will keep the proceeds.
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Pawning is expensive but it requires no credit check and can be a convenient way to raise money short-term. Only use members of the National Pawnbrokers Association, and make sure you can repay it at the time stated. If you do not, then Granny’s ring may be lost for ever.
For further information, search moneyhelper.org.uk for “pawnbrokers”.