Save, make, understand money

Credit Cards & Loans

Warnings raised over pawnbroker loan surge

Warnings raised over pawnbroker loan surge
John Fitzsimons
Written By:
John Fitzsimons

A sharp increase in the number of loans offered through pawnbrokers has led to warnings that borrowers may actually be creating further issues down the line.

Figures from the Financial Conduct Authority show that there has been a substantial increase in the number of new loans being offered by pawnbrokers.

The regulator reported that in 2022/23 a total of £440m in pawnbroking loans were handed to borrowers, up sharply from the £351m offered in 2021/22. The jump is even more notable from 2020/21, when £252m was taken out in pawnbroker loans.

How do pawnbroker loans work?

With a pawnbroker loan, you need to offer up some form of collateral in return for the loan. This could be jewellery, an electrical item ‒ anything with some actual value.

This is then ‘pledged’ with the pawnbroker for a set period of time.

In exchange for doing so, the pawnbroker will offer you a cash loan. The value of this loan will be significantly lower than the actual value of the item, perhaps only half of what it is really worth.

Interest is then charged on the loan each month, typically at a rate of up to 8%. The borrower can get back the item by repaying the loan and any interest accrued at any point, but if they reach the end of the pledge period and cannot repay the loan then the pawnbroker is free to sell it on. 

Demand for pawnbroking loans is surging

The figures follow data from H&T Group, one of the biggest operators of such loans, back in August which suggested that demand has surged to record levels due to a lack of alternatives.

The firm reported that its pre-tax profits had risen by almost a third to £8.8m in the first half of the year. In addition its pledge book, which details the loans against customer assets, has grown from £85.1m in June last year to £114.6m.

Chris Gillespie, chief executive of H&T Group, said the high levels of demand for such loans was at least partly down to a shortage of alternative options when borrowers are looking for most levels of credit.

He said: “Supply of small-sum credit is constrained now in a way it hasn’t been for many years. If you only want and need to borrow £200, your options are very limited.”

This comes after crackdowns by the regulator into payday loans led many firms to leave the sector altogether, pushing more borrowers into considering pawnbroker loans.

Is the rise in pawnbroking loans a concern?

Concerns have been raised about the spike in pawnbroking loan cases.

StepChange Debt Charity for example said that the rising demand was in large part due to the cost-of-living crisis, with people becoming increasingly desperate in their search for funds.

The charity cautioned that these loans could actually lead to further financial problems in the future, rather than alleviate issues.