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Online pawns shops: Convenient but costly

January 31, 2012 12:00:00 AM PST
Many cash-strapped consumers head to pawnbrokers as a last resort to get a short-term loan to pay off bills.

Online pawnbrokers are hoping to make the loan process easier and less intimidating. But as with any type of loan, consumers should understand what they're getting into before they sign up.

Teresa Howard lost her job and was running out of money and only had days to pay her landlord, or be forced to move out of her Santa Clarita condominium she's renting and sharing with her teenage son.

"I needed to pay my rent because I was facing eviction. It was a really scary time for me," said the independent filmmaker, who has been struggling to find work and keep afloat.

Howard sent her high-end camera and her wedding ring from a marriage that ended in divorce to Pawngo, an online pawnbroker.

The company, in turn, sent her a check for $1,500 and is charging her $90 a month in interest until the loan is paid off.

"There's a cost for that help. But, the situation I was in, I didn't have a choice," Howard said.

Customers like Howard send their valuables to the Denver-area company, which offers between 50 and 75 percent of an item's retail value in cash.

Unlike traditional pawnbrokers, Pawngo only accepts certain items.

"We take high-end watches, we take high-end jewelry, we take gold, precious metals, we take high-end camera equipment, we take anything with an apple on it," said Todd Marks, CEO of Pawngo.com.

Pawngo charges from 3 to 6 percent of the amount loaned each month.

Although the loans are short-term, the annualized basis for a 6 percent monthly loan is actually 72 percent. Some financial experts say that's a price too steep.

"It doesn't matter if you pay this off over a very short period or not. This is still a very high cost of accessing money, higher than virtually anything else you may have access to," said Greg McBride, a senior financial analyst at Bankrate.com.

Pawngo borrowers have three months to pay back the loan or they can renew it for another three months. At the end of the loan period, customers have to pay off the balance in full in order to get their items returned.

If they can't pay it back, they forfeit the loan and Pawngo writes off the balance and keeps the items.

Many customers like Howard acknowledge that while interest rates are high, it's worth the expense to get them out of a dire situation.

For customers who are leery of sending their valuables to an online pawnbroker, Pawngo says the items are fully insured by Lloyds of London, a British insurance market, and that its financial transactions are secure and handled by Wells Fargo Bank.