You may wonder about the main differences between bank loans and pawn loans. Well, these two types of loans are very different from each other. A bank loan can be used for various purposes, like buying an automobile, a house, vacation, holiday and to pay college tuition. On the other hand, a pawn loan is for specific purposes only, such as buying food, paying for your rent and utility bills, paying your medical bills and to pay your car insurance.

How Bank Loans Work 

Bank loans are fully secured. This means that if you fail to repay your bank loan, then the bank will take your collateral, which is usually an item of value that you have pledged. The bank will auction off your collateral to get at least some of its money back.

Note that in most cases, a loan would not be taken by someone who is an income-generating employee. In such cases, the collateral will be your vehicle.

In the case of a home loan, if you fail to repay it, then the bank would take your home. In terms of your car loan, the bank would repossess the vehicle. The same goes when you fail to pay repay for your student loan. This is because the interest rate of bank loans is very high. And, it increases by a large margin if you fail to pay your loan on a regular basis.

How Pawn Loans Work

A pawn loan is also a secured loan but there is one major difference. In the case of a bank loan, the collateral is something that you own. For a pawn loan, the collateral is something that you will buy once you get the money from the pawn loan. In short, the lender would be getting an item from you as collateral. This is what makes a pawn loan a very risky business for the pawn shop owner.

For example, a person seeks a pawn loan for $150 to pay for their fuel. They may pledge their very old watch that is worth $40. So, the pawn shop will give them the $150 and the customer will come back in one month to redeem that watch. The customer may even get the watch appraised and then sell it at a pawn shop that values the watch at $235. So, the pawn shop owner will sell the watch at $235. The customer will get the watch at $235, but the pawn shop owner will have lost $180.

 If you fail to repay the loan, then the lender would be getting back the item that you have pledged. Note that in the case of a pawn loan, once the lender has taken your item of value, you will not be getting that item back until you have fully repaid your loan.

The Difference in Interest Rates

As for interest rates, a bank loan has an interest rate that is much higher than a pawn loan. This is because of the fact that a bank loan is secured by a collateral, which is something you own.

On the other hand, a pawn loan does not require you to secure the loan with a collateral of your property. It only requires a pledge to a collateral. The reason for this is that a pawn loan is a risky business for the pawn shop owner. That is why the interest rate is not so high. This means that the pawn shop owner can afford to give a loan to a person who is not likely to repay the loan.

Conclusion

These are some of the main differences between bank loans and pawn loans. When you are down to choosing between a bank loan and a pawn loan, try to ponder on this article so you can make the right decision suited to your financial needs.

River City Pawn is a pawn shop in Leitchfield, KY that offers pawn loans to those in need of financial assistance. Let us take care of your pawn loans right away. Contact us to get started!