A pawn shop is quite possibly one of the most misunderstood business models around. When people think of a pawn shop, one thing usually comes to mind: crime! Although the pawn industry does have more than its fair share of bad apples, it’s by no means a criminal’s paradise. In fact, pawn shops have a long and reputable history of helping people and businesses in financial distress.
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Pawn Shop Definition
A pawn shop is a business that offers loans on items that are not accepted as collateral by traditional banks. Loans amounts are usually determined by an item’s market value and are expected to be repaid within a specified time frame. If the loan is not repaid (with interest), the borrower’s collateral will be liquidated to recoup any losses incurred by default.
In Layman’s Terms
A pawn shop is a place that will give you quick cash (in the form of a loan) for household items like jewelry, electronics and collectibles. When you pawn an item, the pawnbroker holds your item as collateral until you repay the loan plus interest. If you fail to repay the loan, the pawnbroker will sell your item to someone else and recoup his losses.
If you’re like me, you learn by examples and the previous definitions didn’t make things any clearer. So let’s break down how pawning works using a step-by-step scenario.
- Bob is a construction worker that lives paycheck by paycheck. One day, Bob’s employer encounters a glitch with their payroll system and now paychecks are delayed until next week.
- Bob is already behind on his rent and can’t afford to wait an extra week for his paycheck. He has two options: keep hiding from his landlord or visit a pawn shop.
- Since he only needs a loan for a week, Bob decides to visit a pawnbroker. He pawns some of his personal tools that he won’t need anytime soon.
- Bob receives a loan for his tools and then pays his landlord immediately.
- One week later, Bob finally gets his paycheck. He revisits the pawnbroker and pays back the loan with interest. The pawnbroker gives Bob back his tools and now he lives happily ever after, until next month.
Keep in mind that not all pawn transactions will go this smoothly. For example, if Bob failed to repay his loan, he would have lost his tools. The pawnbroker would have sold his tools to a random guy called Joe who happens to work with Bob (oh the irony).
If you’re still a little fuzzy after reading the scenario, check out this video that outlines the whole concept in less than 60 seconds.
A Little History
What’s a definition without a little history? It turns out that pawn shops date back to the 5th century with the earliest pawnbrokers being Buddhist monasteries. Thanks to the Roman Empire, the popularity of pawning spread like wild fire across the west. Today, most of the rules and regulations that govern pawnbrokers are derived from Roman jurisprudence, a fancy word for law.
Up until the History channel’s reality television series “Pawn Stars”, the business model of a pawn shop was largely misunderstood. Funny enough, it wasn’t that long ago when people thought selling their items to a pawn shop was “bad business”.
Now let’s shed some more light on pawing by answering a few commonly asked questions.
Frequently Asked Questions
What is a pawnbroker? A pawnbroker is individual or an entity (known as a pawn shop)who loans money at interest on non-traditional collateral presented by a borrower.
How does pawning work? The process of pawning can be summarized by the following steps: find an item of value to pawn, determine the value of your item, locate the nearest pawn shop in your area, bring any documents that may prove the authenticity and ownership of your item, present your item to the pawnbroker, secure your loan, repay your loan with any additional interest and redeem your item.
For a detailed explanation of the pawning process, read this.
What is a pawn loan? A pawn loan is a collateral loan issued by a pawnbroker. The loan amount is determined by the market value (street price) of the borrower’s collateral. Pawnbrokers usually lend out 10% to 50% of the collateral’s market price to protect themselves from heavy losses. Thus, it should be in the borrower’s best interest to negotiate a higher percentage of their collateral’s market value.
How long do you have to pay back a pawn shop? A loan from a pawnbroker is usually considered a short term loan. Most brokers issue loans on a 30-day basis. This means you have 30 days to pay back the loan in full or pay the interest accrued and renew the loan for another 30 days. For example, if you borrow $500 at 20% interest, you will have 30 days to pay back $600 or pay $100 to renew the loan for 30 more days.
What is the average interest rate on pawn loans? Interest rates on pawn loans vary widely and are regulated by each state independently. However, it is not uncommon to find interest rates between the ranges of 20%-25%. Although it is the state’s responsibility to set a maximum interest rate, it is ultimately up to the pawnbroker to decide their interest rate as long as it doesn’t exceed the maximum rate.
What are the rules and regulations of the pawn industry? The rules and regulations that govern pawn shops vary by state and local municipalities. However, there are 13 federal laws that apply to all pawn shops in the United States. These laws include but are not limited to the following: Bank Secrecy Act, USA Patriot Act, Truth in Lending, Equal Credit Opportunity Act, and Gramm-Leach-Bliley Act.