The MCO has hit us bad. With many of us losing our jobs or taking a pay cut, we find ourselves low on cash. Taking a loan seems like an option to survive. But should we get a loan from the bank or should we consider going to a pawnbroker?
Let’s learn more about pawnbroking to figure out if it’s the best way to borrow money.
What is pawnbroking and how does it work?
Pawnbroking is regulated by the Pawnbrokers Act 1972. Pawnbrokers do two things: Buy your valuable items or offer collateral-based loans. A collateral-based loan is when you are given a loan in exchange for something valuable of yours in case you can’t pay back the loan.
These are the steps to get a collateral-based loan from a pawn shop:
- You take a valuable item, like gold jewellery, to the pawn shop.
- The pawnbroker will value your item.
- The pawnbroker offers you a loan (with interest).
- You take the loan and leave your item at the pawn shop (They will give you a pawn slip with details of your items, amount of the loan and your personal particulars).
- Pay the loan with interest and you can take back your valuable item.
What can you pawn?
Most pawn shops accept gold. But there are some pawn shops that accept items such as luxury watches and handbags, handphones and laptops. It’s best to check with your pawn shop what items they accept.
What to look out for
- Only go to a licensed pawnbroker. All pawn shops are required to show their license. Check here for the list of licensed pawn shops.
- The maximum loan you can get from pawn shops is RM10,000 with a maximum flat interest of 2% per month or 24% per year. It is illegal for pawn shops to charge you interest higher than this.
- Loans are usually given for up to 6 months. You can choose to repay it monthly or at the end of the 6 months.
- If you can’t repay your loan within the first 6 months, you can get an extension. There is no maximum extension period, but the extension needs to be agreed on between you and your pawnbroker. You may have to pay some extra costs, such as the interest you owe or processing fees.
- If you still can’t repay the pawn shop after your loan period, your items will then belong to the pawn shop.
- For items above RM200, the pawnbroker is supposed to have an auction to sell your item. If they make more from the sale than the value of your loan, you should get the balance back.
- Make sure you receive a pawn slip, check that the details are correct and keep it safely. The pawn slip is proof that you have given a valuable item, so you will need it to get your items back.
- If you extend your loan, make sure the loan extension is recorded in the pawnbroker’s books and on your slip. If you forget to check that your slip and the pawnbrokers records are updated, your extension will not be valid and you will have missed the due date.
- The pawn shop will value your items lower than the items’ actual value. They do this to factor in interest cost in case you can’t repay the loan.
- Your item could be damaged when you collect it. We’ve heard of cases where items returned are damaged or the gold weighs less than when you sent it in. Please make sure to check on that!
There are also pawn shops which follow Shariah principles. They differ from regular pawn shops in the following ways:
- There is no interest charged, so you only pay the amount you borrow
- There is a safekeeping fee for your valuable item. In some cases, when your valuables are returned to you, there may be some slight damage. The safekeeping fee is to make sure that does not happen.
How does pawnbroking compare to personal loans and credit cards?
|Source of Loan||Pawnbroker||Credit Card||Personal Loans|
|Loan amount (RM)||5,000||5,000||5,000|
|Loan duration||1 year||1 year||1 year|
|Interest rate per year %||24||18||10|
|Effective interest rate %||50.57*||18||19.43*|
|Affects your credit score||No||Yes||Yes|
*Rate based on our EIR calculator
Pawnbroking pros and cons
Although pawnbroking has the highest interest costs, it has some advantages:
- If you are unable to pay the loan, the most you’ll lose is the item that you pawned. However, for credit cards and personal loans, the interest penalties could keep growing.
- If you don’t pay the loan, your credit score won’t be affected.
- You do not have to pay monthly and can repay at the end of your loan instead.
- You don’t need to show a payslip or other documents usually needed for personal loans and credit cards.
Before you think about pawning your belongings, beware of the following disadvantages:
- Interest rates for pawnbroking are more than double of personal loans, making it the most expensive way to borrow money.
- If you use pawnbroking as a way to support your lifestyle, it could lead to you pawning all your valuables and have nothing left.
- Pawn shops will give you a loan no matter what your financial situation is. If you cannot pay it back and you will eventually lose your valued item.
What are your options if you need cash?
You should only go to a pawn shop if you need cash urgently but you can’t get a loan because you have a bad credit score. Instead, you could:
- Consider selling your valuables so you will not have to pay any interest.
- Use your credit card if you have a short-term financial problem and you are sure you will be able to pay it back. The interest charged will be lower than a pawnbroking loan.
- Get a personal loan if you have a long-term financial problem and are not sure when you will recover from it.