Question

Discuss the advantages and disadvantages of pawnshop loans as compared to banking loans.

Answer 1

Pros of pawnshop and bank

(1)Pawn shop loans can be an attractive option if your credit is rough and you’re not able to take out a traditional loan.

For people with no bank account or no one to turn to as a cosigner, pawn loans can be a quick source of money — there’s no credit check required.

Your credit scores won’t be affected if you don’t repay your loan, and you won’t have to worry about getting calls from debt collectors. The consequences of not repaying a pawn shop loan are that the pawnshop keeps whatever you pawned.  

(2) A bank loans money to a business based on the business's value and its perceived ability to service the loan by making payments on time and in full. Unlike equity finance, banks do not take any ownership position in businesses where the business issues shares. Bank personnel also do not get involved in running a business to which a bank grants a loan. This means you ghetto retain full management and control of your business with no external interference.

Bank Loan is Temporary; once a business borrower has paid off a loan, there is no more obligation to or involvement with the bank lender unless the borrower wishes to take out a subsequent loan. Compare this with equity finance, where the company may be paying out dividends to shareholders as long as the business exists.

Interest is Tax Deductible; the interest on business bank loans is tax-deductible. Also, especially with fixed-rate loans, in which the interest rate does not change during the course of a loan, loan servicing payments remain the same throughout the life of the loan. This makes it easy for businesses to budget and plan for monthly loan payments. Even if the loan is an adjustable-rate loan, business owners can use a simple spreadsheet to compute future payments in a change in rates.

Cons of pawnshop and bank

(1) The most significant drawback of a pawn shop loan is its cost.

Interest rates and finance charges for pawnshop loans are often high. It’s common to see interest rates between 5% and 25% a month.

Another disadvantage is that if you don’t repay your loan on time, the pawnshop can sell your item. And you won’t get reimbursed if your item is sold for more than your loan amount.

Some pawnshops also charge additional fees to pay for things like storage, insurance, or renewing the loan for a new term.

And pawnshops can be a little sketchy. Legal actions against pawn shops aren’t exactly rare — the Consumer Financial Protection Bureau has taken action against several pawnbrokers, alleging they were dishonest about the annual costs of loans.

(2) Tough to Qualify, One of the greatest disadvantages to bank loans is that they are tough to obtain unless a small business has a substantial track record or valuable collateral such as real estate. Banks are careful to lend only to businesses that can clearly repay their loans, and they also make sure that they can cover losses in the event of default. Business borrowers can be required to provide personal guarantees, which means the borrower's personal assets can be seized if the business fails and is unable to repay all or part of a loan.

High-Interest Rates, Interest rates for small-business loans from banks can be quite high, and the amount of bank funding for which a business qualifies is often not sufficient to completely meet its needs. The high-interest rate for the funding a business does receive often stunts its expansion because the business needs to service the loan and deal with additional funding to cover funds not provided by the bank. Loans guaranteed by the U.S. Small Business Administration offer better terms than other loans, but the requirements to qualify for these subsidized bank loans are stringent.