How Do Pawnshops Work?

If you know anything about easy and quick loans, you will probably be aware that you can get yourself a quick and easy loan from a pawnshop. Although, while these loans are quick and easy to get, it does not mean you should get one. 

Pawnshop loans can be pretty risky sometimes, and it is advised to take another route if you can. They are often put in the similar category as payday loans for how much risk they carry. 

Pawnshops will make a large chunk of their money by providing personal loans, as well as reselling items and offering other auxiliary services, including activating cell phones and transferring money. 

They earn interest on their loans and make profits on the retail side of their business to generate an income. This makes pawnshops a pretty lucrative business.

However, right now, we want to know exactly how pawn shops work, and what to expect if you decide that you want to go to them for your next loan. 

What’s The Deal With Pawn Shops?

The concept behind pawn shops has been around for a very, very long time, thousands of years. The most basic idea behind them is for loans. But how does this work exactly? Well, here is how. 

• You approach a pawnbroker, bringing them something that you own. You give it to the pawnbroker as a collateral for a loan that you need based on the item’s potential worth. This in itself is an act known as pawning. 
• The pawnbroker will then loan you money against this item as collateral.
• Once you have repaid the loan, as well as the interest added (yes, there is interest as well), you will get your collateral item back. 
• However, if you do not repay the loan then the pawnbroker gets to keep the item you gave them as collateral.

The concept in itself is actually pretty simple, not dissimilar from other loan types, however, unlike other loan types you will find that the collateral will usually be a lot smaller than with other collateral loans which would take repossession of your home or car if not paid off. 

How They Make Their Cash

There are two primary incomes for pawnshops, these are personal loans and reselling items. While they do have other sources of income, these are the primary sources of income for a pawn shop. 

Let’s look at these in more detail.

Personal Loans

This is the primary form of revenue for pawn shops. They make their most money from making loans and earn interest on the loans that they lend out. They make loans to people who give over custody of an item as collateral. 

This item would be a TV, Computer, Heirloom, and so on, and this item is their collateral for the loan. 

They will give an amount of money based on the value of the item, and what it could be sold for should they default on the loan. However, the amount of the loan could also be affected by the inventory the pawn shop has at the time this loan is taken out. 

This means that if you want to borrow money based on a TV you take in, if they already have a lot of TV’s then they will offer much less money than if they had fewer TVs.

Reselling 

Their second source of income is retail. They will have merchandise that they have purchased from people and also items that were collateral by borrowers who defaulted on their loans. 

They will usually offer more money to purchase an item outright than for a loan, usually up to 15%, as they know that the item will be available for resale immediately.  

However, if a loan was upheld for a long while, the pawnbroker may actually have already made a profit from interest alone for the default. Yet the amount of time that has passed also means that the item may not be as valuable for resale. 

How Does Pawning Work?

Pawning is basically just the use of collateral loans. Pawn shops can lend money on any item of value, this could be a TV like our previous example, or it could be jewelry, musical instruments, electronics, firearms, and so on. 

There are some pawn shops who specialize in particular items, however, so they may only take electronics, or specialize in jewelry for the most part. 

The loan is the value of whatever item you have put down as collateral. So, if you provide a $400 TV as collateral, you will get $400 and also have to pay back interest as well. Or at least that is the basics of it.

Why Use A Pawnbroker?

So, why do people use pawnbrokers and not just take out a loan at a bank? Well, they are a quick, easy, and confidential way for people to borrow money. It is faster than at a bank for starters. It is a choice often used for short term cash that is not met with credit checks. 

Credit checks can be something that often holds people back if they do not have the best credit score. And, with that banks and other lenders often have legal consequences should you default on the loan. 

Pawn Shop loans do not make you overextend your credit, or force you into bankruptcy either. So, people often see them as fairly safe for short-term cash.

How Much Can You Expect From Them?

Loans from a pawn shop can vary depending on the item’s value. There is no minimum amount, however, in some states there may be laws around the maximum amounts. 

The amount you will get will be determined by the item you put down as being collateral, however, other factors will also be weighed in too. 

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