Having to borrow money to make ends meet is never ideal. However, given the current situation in Singapore, and most other countries in the world, many people are finding themselves caught in a dire situation where they need urgent cash to continue living life normally.
To get short-term cash flow, people can consider options such as applying for a personal loan from a bank or to borrow from a pawnshop by pledging an item.
Both of these are legal options for you to borrow money from, and you should use them over illegal moneylenders, which are not only illegal but are also likely to give you more problems than the one you are trying to solve.
Advantages Of Using Personal Loans
Let’s start with why some people prefer using a personal loan.
No Need For Collateral
To get a loan from a pawnshop, you first need to pledge an item. This item has to be of value to the pawnshop and should ideally be a product that can retain its value well over time (e.g. gold, branded watches).
For personal loans, there is no need to pledge any items to the bank. Instead, banks will typically look at your monthly salary and lend you a multiple of your monthly income. You can apply for this without any collateral. If the bank approves your application, the loan will be disbursed.
Lower Interest Rates
Given that personal loans do not require you to pledge an item, one would naturally expect the interest rates to be higher as compared to the rates charged by pawn shops. Surprisingly, this isn’t true.
Personal loans such as the Standard Chartered CashOne Personal Loan charge an effective interest rate from as low as 7.63% per annum. In contrast, most pawnshops in Singapore will charge about 1.5% per month for the borrowed sum, or about 18% per annum.
Advantages Of Borrowing From Pawnshops
In the digital banking age that we live in today, it’s easy to dismiss pawnshops as a relic of the past. However, if you need a quick loan, borrowing from a pawnshop is a viable option that you should at least consider.
Flexible Repayment Schedule
If you are unsure about how long you may need the borrowed money from, a pawn shop could be a better option. Traditionally, pawnshops do not give you a timeframe for how long you can borrow, or how long you need to borrow.
For example, if you are borrowing $1,000 at 1.5% per month, you can choose to repay the borrowed money with interest ($1,015) the following month.
The pawn ticket that you get will indicate how long the pawnshop will hold on to your pledge items. Usually, it’s about six months. This means you will need to either renew your pawn ticket after six months by paying the interest to the pawnshop, or to redeem the item by paying the full amount plus interest.
This gives you the flexibility to decide how long you want to borrow the money for.
Also, personal loans will require you to make monthly repayments for the duration of the loan. For pawnshops, you only need to make a bullet payment on the borrowed money with interest when you want to redeem your item.
No Need For Credit History
When you take a personal loan, the bank will assess your creditworthiness by looking at your credit history and whether or not you have a job. Based on these criteria, they will then decide how much they are willing to lend you, if any.
For pawnshops, this isn’t an issue. Pawnshops appraise the value of the items that you are pledging, and then give you a loan based on a percentage of the appraised value of the items. Since the pawnshops make money from the interest, there is little reason for them to appraise it at a lower value than what the items are actually worth.
Of course, you can also choose to borrow a smaller amount than what you can borrow from the pawnshop.
What Happens When You Default On Your Payments?
In our opinion, the biggest advantage of using pawnshops is what happens if you default on your payment.
For pawnshops, since you have already pledged your item to the pawnshop, the pawnshop is legally allowed to sell off your items to recover the amount you owe them inclusive of interest. If they were to auction the item at a higher price than what you owe them, then they are obliged to return you the excess money.
This is in contrast with defaulting on your personal loans, where you be held liable for the repayments. You will get multiple letters of demand and could even be made bankrupt if you are unable to repay your personal loan.
Both personal loans and pawn shops are last resort options that you should only consider if you desperately need cash to tide you through this difficult period. Still, it would help if you are able to recognise these differences and to choose which option makes the most sense for you if you need to borrow.