How Does Borrowing Money at a Pawn Shop Work?
Pawn shops provide short-term loans secured by items of value the pawnbroker holds as collateral to guarantee repayment. Pawn shops give consumers a quick, confidential way to borrow money for financial emergencies without credit checks or legal consequences if the loan isn't repaid. All borrowers must provide collateral so pawnbrokers don't need to distinguish between high-risk and low-risk borrowers.
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What Gets Pawned?
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Pawn shops will lend money on any valuable item that's easy to store and not likely to lose value in the short term. Typical pawned items include gold and silver jewelry, acoustic and electronic musical instruments, consumer electronics, tools and collectibles. Pawn shops also will buy items outright, offering a purchase price deeply discounted from the item's expected retail value.
Loan Terms
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For the pawnbroker, pawn shop loans are small-dollar, high-risk, short-duration transactions, with sale of the pawned item being the only recourse if a loan isn't repaid. For this reason, a pawnbroker typically lends about 50 percent of what he thinks the pawned item will bring if sold. The typical pawn shop loan is less than 30 days in duration, with a typical interest rate of 10 percent to 20 percent. The customer gets a pawn ticket stating terms of the loan, description of the pawned item, the amount that must be repaid to redeem the item and the due date for payment. Pawn shop lending is regulated by the states.
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If Loan Isn't Repaid
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If a pawn shop customer doesn't repay the loan by the due date, the pawned item becomes the pawnbroker's property after a grace period specified in the loan agreement, typically 30 to 90 days. On average, 70 percent to 80 percent of loans are repaid, says DealmakerPawn.com. Pawnbrokers prefer that loans are repaid, since they profit from the interest without the risk inherent in a sale of the collateral. Many pawn shop customers are repeaters, pawning and redeeming the same valuables several times a year.
Stolen Item Fears
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A popular myth holds that a lot of stolen items end up in pawn shops. Pawnbrokers actually take great pains to not be stuck with stolen items, since stolen property can be seized by police, meaning the pawnbroker loses both the item and the money he loaned. Pawnbrokers generally require that customers provide full identification and may require evidence that an item was acquired legitimately. They also maintain close ties with local police. They have learned to spot the tell-tale signs that property might be stolen and will report suspicious customers to police.
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