Is Online Pawnbroking the Future of Short-Term Lending?

23-Apr-2010

If you're in need of short-term cash, there may be more options open to you than you think.  A credit card offering zero per cent on purchases is the lowest-risk way of borrowing money on a short-term basis, as long as you plan to pay it back before you start getting charged interest on the money you have borrowed.   However it may be that a credit card is not an option for you.  

Maybe debt problems on your credit history prevent you from being accepted, or you don't feel that you could comfortably pay back the money before the interest charges kicked in.  Likewise an unsecured personal loan may not be the answer because these types of loan often offer a lower rate of interest but spin out the repayment over a number of years.

If you're in need of a cash injection but unwilling to choose one of the convenient but very high-interest services on the market, there is an alternative that enables you to make use of assets that you already own; the online pawnbroker.  Now, pawnbroking is nothing new.  You'll be able to find a pawnbroker on the high street in most large towns, and the concept has been around for centuries.  However a new generation of pawnbrokers has sprung up on the Internet such as Borro, purporting to offer customers a discreet, generous and cost-effective way to get hold of quick cash.

So how does it work? If you own a valuable item, whether a watch or a piece of jewellery, or even a painting or a luxury car, you can borrow money against the value of that item.  Because you are borrowing using an asset as collateral on the loan, this loan falls into the 'secured loan' bracket.  You are effectively handing over ownership of that item to the pawnbroker temporarily, until you are able to pay back the loan with interest.  If you're unable to repay the money in full, you lose the item.

This all makes perfect sense if you're going into a local branch of Cash Converters, but what happens when you're using an online service?  Your first step would be to send the company a description of the item, including an estimation of its value on the second-hand market.  The company would then get in touch with you to let you know whether they will consider the item as collateral and book it in for a valuation.  

Borro, the largest and best-known of this new breed of online pawnbrokers, offers customers a free courier service with insurance of up to 30,000 GBP per item, meaning that you can be certain that your item gets safely delivered to the valuation team by the next day.  You are then given a loan offer based on their valuation of the item and can choose whether or not to accept it.  This offer will include interest on the loan (Borro's interest rates are between 4-6%), so you need to take into consideration the fact that you're paying back more than you are borrowing in the first place.

The main reason why people take the 'payday loan' route is because there is no credit check required. Your credit rating, a record of previous debt problems, missed payments or exceeded overdraft limits, can prove to be a serious burden when you need cash. Therefore a bad credit rating is often the reason why someone would have trouble borrowing on a credit card or through a more mainstream provider. With online pawnbroking you have given the broker your item as a guarantee against the loan, meaning that there is minimal risk involved for them in lending money to you.  Therefore, this is another area where you're not required to undergo a credit check.

Of course there are plenty of risks involved.  If you cannot pay back the loan and the interest, you would lose the item that you had put up as collateral, because the online pawnbroker would need to sell it to make back the loan.   Before borrowing money, you always need to be certain that you will be able to pay it back within the loan term.  However, with online pawnbroking, the loss of the item is the only risk you are taking on, as your credit rating is not affected by defaulting on this loan.  Borro will refund you any surplus money after they have sold the item and paid back your loan.  

Of course, as with any borrowing, online pawnbroking has its risks, and its important here just as in every other area of personal finance that you find the best deal for your circumstances.  Therefore, make sure you're fully aware of your options and don't just choose the first solution that you see.  Also, use the APR (which stands for annual percentage rate of change) as the figure for comparison rather than the interest rate, because the APR takes all the additional charges into consideration to give you the true cost of the loan.

Visit the Borrow website to find out more about online pawnbroking and whether it is right for you.