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Pawn Shop 101: Understanding the Complexities of a High-Risk Loan

Posted September 24th, 2012
by Site Administrator

To many, pawn shops do not carry the sterling reputation of a typical money-lending institution such as a bank. Perhaps a dark, dirty store operated by shady characters comes to mind. In reality, most pawn shops are small family-owned businesses that are strictly regulated. Using a pawn shop loan as a quick source of cash is becoming more common, thanks to reality TV shows like Hardcore Pawn and Pawn Stars. If you are considering this option, it pays to educate yourself about the process first.

 Pawn Shop Sign

Traditional pawn shop sign.

Are Pawn Shops a New Industry?

The concept of pawning items for cash has been around for over 3,000 years. In ancient China, peasants traded items of worth, usually clothes, for short-term loans. The practice spread to Greece and Rome, and by the 14th century, pawning was a typical method to finance business endeavors. Social stigma was nonexistent, some wealthy families even established their reputations as money lenders. King Edward III of England pawned the royal jewels to the Lombardi family to pay for his war against France, and Spain’s Queen Isabella sold her jewelry to fund Christopher Columbus’s explorations to the New World.

During the Great Depression in the U.S., pawnbroking thrived as banks failed and consumers had no other option for cash loans. In this century, pawn shops enjoy increased business partly due to the success of reality television and partly due to economic woes.Typical during any recession, the value of gold increased dramatically; in 2009 gold was worth over $1,100 an ounce. Customers flocked to pawn shops to sell their gold and jewelry. The trend continues today.


How Does a Pawn Loan Work?

Transactions at pawn shops are based on collateral. Something of financial worth is held as security against a short-term cash loan, meaning that the pawnbroker keeps the item until you pay back what you borrowed. If you default on the terms of the loan, the broker has the right to sell the item. You may also sell items to pawn brokers for cash, though some brokers are unenthusiastic about an outright purchase because there is more profit in loans.

If a pawnbroker accepts your item, a cash loan will be extended based on the broker’s assessment of its value. All pawn shops are state-regulated and have varying ceilings on allowable fees, but most pawn loans carry interest of 5% to 25% a month. Other fees and service charges may be added. Pawnbrokers claim that most added charges are still less than the cost of a returned check or disconnected utility fee.

When you take out a pawn loan, you will be asked to produce photo identification and perhaps have a short chat with the pawnbroker about the history of the item and how you came to own it. You will receive a pawn ticket that serves as both a receipt for your item and as a list of the terms of your loan. To reclaim your item, you must return to pay off the loan in full by the deadline you have agreed to meet. Typical loan lengths are one to four months. At the end of the loan period, the pawnbroker is legally entitled to sell your item if you have not returned with payment.

If you do not repay the loan, the sale of the item covers the lender’s cost. Most pawnbrokers will offer you about half of what an item is worth, keeping potential profit in reserve if you don’t pay. As long as you meet the terms of the loan, your item will be safely stored. In fact, some customers use pawn shops for storing their valuables while traveling.


What Can I Pawn?

Each pawnbroker sets the rules about the items that will be accepted. Some brokers will take big-ticket items like boats or vehicle titles but most deal in smaller, more portable merchandise. Commonly pawned items include:

    • Electronics: Televisions, video game consoles, computers and peripheral equipment, DVD players, cell phones, digital cameras, stereo systems and camcorders are most often accepted.
    • Jewelry: Any item that is gold, silver or platinum will generally be accepted.Gemstones including diamonds and more valuable rubies, sapphires, emeralds, topaz and amethyst are often considered of worth as well.
    • Tools: Power tools are enthusiastically accepted by pawnbrokers if they are in good condition. Drills, chainsaws, generators, air compressors and sanders are all good choices. Some brokers accept higher-end household items like vacuum cleaners.
    • Sporting equipment: Golf clubs, snowboards, skis, binoculars and fishing equipment may all be considered good collateral for pawn loans. Many brokers also deal in firearms.
    • Musical instruments: Many pawnbrokers will accept guitars, electronic keyboards, drum sets, band instruments or DJ equipment.
    • Miscellaneous metal: Gold will usually be accepted in any form; gold nuggets, broken belt buckles and even gold teeth can be redeemed for cash at most pawn shops. Old coins are often valuable and can also be pawned.

Be sure that all items are clean and in operable condition. Items that are missing a crucial part or need repair will be refused. Televisions should be accompanied by the remote control and the owner’s manual. Outdated electronics that are unlikely to generate buyer interest are usually not accepted.

Is Pawning Safe?

Contrary to the expectations of some, pawn shop lending is quite safe. Pawnbrokers are strictly regulated by state government and must also adhere to 13 federal laws. Every part of pawn shop transactions, including interest rates, record-keeping and reporting, is regulated. Many pawn brokers are required to report transactions every day. Information about your name, address and phone number will be reported, but your privacy is also federally protected.

Perhaps vilified in the media as a place to dispose of stolen goods, pawn shops actually work closely with local law enforcement to identify theft. The industry also self-regulates by licensing members of the National Pawnbrokers Association. Check to see if your local broker is a member. Consider pawn shops good places to purchase merchandise at vastly reduced prices. In fact, many brokers will take your contact information and alert you if something you want to buy becomes available for sale.


What Are Some Best Practices for Pawning?

Preparation before you pawn can make the process smoother for everyone.

    • Know your item’s worth before you start researching websites like Craigslist or eBay for going prices. If you have an item that you think is of significant value, have it appraised first. Be prepared to negotiate, however, and understand that brokers operate a business.
    • If you are unsure about the broker’s integrity, ask how long they’ve been in business and avoid anything that appears to be sketchy. Reputable pawnbrokers run clean, well-lit shops in areas where it is safe to park. Many are part of chains, and a business with multiple locations is less likely to close while they are holding your merchandise.
    • Inquire about the shop’s insurance policy for your item; insurance information should be included on your pawn ticket.

If you are confident that you can pay off your loan in the time frame required, pawning can be a useful tool. Credit checks are not required and payment information is not reported to credit agencies. Your item will not be displayed for sale unless you default on the loan.

If you are prepared to risk losing something valuable and pay higher fees for the convenience of a pawn shop loan, pawning is a safe and effective short-term cash solution. Remember, however, that you are taking a risk; less expensive options are available for short-term loans.


Image available under Creative Commons License via Albert Bridge




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