Inside the rise of expensive pawn loans and affordable alternatives

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IF cash is tight, you may have considered pawning an item of value.

Maybe it could be a piece of jewelry, a watch, or a bag.

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We research pawn loans and provide advice on affordable alternatives.

The cost-of-living crisis has seen a boom in pawn loans, where money is made available in exchange for a valuable item that, if repaid, can be sold.

But experts warn that loans are expensive and if you can’t repay the debt, you could lose a sentimental possession.

This week, Sun Money investigates these loans and provides advice on affordable alternatives.

EXPENSIVE RATES

YOU could end up paying hundreds of pounds in interest. Three of the UK’s largest pawnbrokers, Cash Converters, Ramsdens and H&T, charge between 118.8 and 119.9 per cent a year.

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This means that if you borrow £500 over six months, you will have to pay £299 in interest, or £799 in total, at a rate of 119.9 per cent.

The loans are much more expensive than those from major banks, but cheaper than payday loans.

Many quote a monthly or daily interest rate, but must also show the annual rate.

Often you can only borrow a percentage of an item. For example, if your ring was worth £200, you may only be able to borrow £100. Sometimes you have to repay the loan in one lump sum.

An H&T spokesperson said: “We serve clients who are unable to raise funds in the traditional bank credit system, or who need a short-term, small-value loan to meet an immediate financing need.”

AFFORDABILITY FEARS

Pawn shops do not conduct credit checks. This can be an advantage if you have a low credit score, but it means there are no guarantees to make sure you can pay back the loan.

Debt adviser Sara Williams of Debt Camel said: “Some people find they redeem an item, but that has left them so strapped for cash that they are forced to pawn it again in a few weeks.

“A one-time convenience can turn into a long-running nightmare, especially if you’re pawning jewelry with sentimental value.”

A spokesman for the Financial Conduct Authority said: “We have reformed the market to help borrowers avoid spiraling into debt and we have been clear with lenders about the need to support customers if they are in difficulty.

“We will take action if companies do not meet their obligations.”

IF YOU DO NOT PAY THE LOAN

If you make the payments on time, you can get the pawned item back. But you must keep the receipt.

If you lose it and the item costs more than £75, you will have to pay a fee to have the property sworn to by a magistrate or commissioner of oaths. If you can’t repay the loan, the item is sold.

James Daley of Fairer Finance said: “Avoid pawning any item with high sentimental value unless you are confident in your ability to pay.”

If your item is resold, you should be sent any additional money the lender receives, over and above what you were offered for it.

James adds: “In the past, pawn shops have failed to bring customers together with this extra money.

“So if you pawn something and it sells, check how much it sold for and look at the cash you’re owed.”

AFFORDABLE ALTERNATIVES

IF you need to borrow money, look for alternative options. Remember, emergency credit should only be used in extreme circumstances, perhaps to pay a priority bill or if your car breaks down.

If you’re low-income or have a low credit score, you may have a hard time qualifying for the best loan rates on the street. That’s why affordable alternatives are important.

First of all, try to get free cash in the form of grants. If you receive benefits, talk to your job coach about the Home Support Fund. Or ask your local council if they can help.

Or Jane Tully of MoneyAdviceTrust, suggests: “Credit unions often offer a range of affordable products at lower rates and there is a limit on the amount of interest they can charge.”

If you’re having trouble paying a bill, talk to your provider.

Use Turn2Us to search for grants or talk to End Furniture Poverty, if you need furniture or a new fridge-freezer, for example.

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Responsible lenders like Fair For You offer low-cost loans to help purchase home essentials. Iceland makes interest-free microloans of £75, in the form of a preloaded card to spend at the supermarket.

You can seek free debt advice from Citizens Advice, StepChange, or National Debtline.

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