Ballpark Estimate: 25% (or more) interest on a loan or pawned item
So you take a look at your electric bill and realize you don’t have the funds to cover it. Or maybe you’ve got the funds, but they’re set aside for groceries. The electric bill is due in two days. What do you do?
In tough economic times, more people are turning to pawn shops when they need quick cash; and pawn shops are, in turn, becoming more socially acceptable business operations. Traditionally located in poorer neighborhoods, pawn shops developed a reputation of being dark, dingy, and sometimes dangerous places where stolen goods were bought and sold. Times have definitely changed.
Pawn Shop Business Is a Sign of the Times
The pawn shop industry of today reflects how our struggling economy affects the working class. For instance, some pawn shop owners report that more people are pawning power tools and construction supplies, suggesting jobs lost, projects put on hold, and people out of work. But pawn shops no longer cater strictly to working class customers. Plenty of pawn shops have opened in the suburbs, where the well-to-do drive up to the stores in late model cars to pawn surprisingly valuable items in exchange for quick cash.
In the past, pawn shops specialized in fairly small loans, usually between $75 and $100. But lately, the pawn shops are doing a lot more business; people are seeking larger loans and are pawning more substantial items. More people are living paycheck to paycheck, and extending their loans for an extra 30 to 45 days. More people are defaulting on their loans and the pawn shops are filling with merchandise. Right now, it’s a shopper’s market, and good deals are often found at pawn shops. But fewer people have the money to buy.
How It Works
A pawnbroker will usually accept anything he (or she) thinks can be turned around and sold for a profit. That’s the business of pawn shops. You bring in an item of value as collateral on your loan. The pawnbroker first decides if the store needs the item at all. For instance, wristwatches are usually in abundance and are hard to sell. On the other hand, unusual jewelry, flat screen TV sets, iPods, golf clubs, or laptop computers are likely possibilities.
The amount of cash you are offered will vary from pawn shop to pawn shop, but you can expect to be offered anywhere between 10% and 40% of the item’s “fair market value”—a fairly subjective judgment call. Items of higher value often merit a higher percentage. For instance, you may be offered 10% of the value for your wristwatch, whereas you may be offered 40% of the value for your motorcycle or power tools. It all depends on how easily the pawn shop will be able to sell the item, in case you default on your loan.
Pawn Shops Work With the Police
Let’s say you bring in a DVD player. If the pawnbroker accepts it, you will receive a pawn ticket. The pawn shop keeps a copy of this ticket and a third copy will be sent to the local police. The pawn ticket will include very specific information about the DVD player: brand name, serial number, model number, size, color, type, and a detailed description. This way, the police can check the item against their records of stolen property.
The pawnbroker will then record your personal information: your name, address, date of birth; and your valid, government-issued picture ID number will be recorded as well. In some states, you may be fingerprinted and your physical appearance (height, weight, and ethnicity) will also be written down. All this information is given to the police. In this way, pawn shops really do work in partnership with law enforcement, in an attempt to prevent the sale or purchase of stolen property. As a result, less than one-tenth of 1% of items received by pawn shops are stolen merchandise.
Finally, the pawnbroker will record the date of the pawn, the maturity date of the pawn transaction, the amount due for the item, the rate per loan period, and the interest charge for the item. If you are buying something from the store, the broker will keep the original information about the item and will take down your personal information, date of sale, and dollar amount of the transaction.
Note: All pawn shops are required by law to report all transactions to law enforcement.
No Background Checks
The good news is that when you pawn something, there are no credit checks, and no one asks about your bank accounts or whether or not you pay your bills. There are no calls to your employer. In fact, you don’t even have to be holding down a job. There are no background checks, either. All you need is a valid, government-issued picture ID, and a legally-owned item of value that you want to pawn. You are getting a “secured loan.” Your pawned item is the security on the loan, and that’s all the pawnbroker really needs from you.
Interest and Loan Period
Interest on your loan will vary by state, but it’s generally between 20% and 25%. Let’s say that you pawn your leather jacket and get $100 cash for it. In your state, perhaps the interest rate is set at 20%. You will owe the pawnbroker $120 at the end of the loan period. Loan periods also vary by state but are usually between one and four months. Let’s say your loan period is two months. At the end of the period, you have three choices:
Pay In Full Plus Interest
You can pay the broker $120 and get your jacket back.
Pay The Interest
You can pay the broker the interest ($20), which renews the loan. The broker keeps your jacket, but will not put it up for sale. You have another two months to either raise the $120 to get your jacket back, or raise another $20 to renew the loan again. You can renew the loan indefinitely, by paying the interest at the end of each loan period. [Note that if you do this for a year, you will have paid $120 in interest alone, and you still won’t have your jacket back.]
Default On The Loan
You can default on your loan, not pay anything at all, and your jacket becomes the property of the pawn shop. It will be put up for sale. [Note: In some states, there is a “grace period” if you forget to pay the interest on time.] You can, of course, buy your jacket back, but it will be at the store’s increased market price – a really bad deal for you.
Penalties or Fees?
You may wonder if there are any penalties if you default on your loan and lose your pawned item. The answer is no. You are more than welcome to pawn more merchandise, even while failing to pay for some other pawned item. There are no penalties or fees. Each pawn transaction is considered separately. The pawn shop is a business, not a bank, and they are in the business of making secured loans, and keeping and selling the collateral if their clients default.
The majority of customers return before the loan period ends, pay back the amount borrowed plus the interest accrued and get their pawned items back. Pawnbrokers say that when customers borrow larger amounts of money, only about 15% default on their loans. But when the amount of borrowed money is small, say $10 or so, the default probability rises to about 40% or higher.
The Bottom Line
When all is said and done, pawning property for cash is a money losing proposition. You are charged an extremely high interest rate. If you’re unable to repay your loan within the specified loan period, you stand to lose more money in interest, or you will lose your pawned item, for much less than it’s actually worth. Because there are no fees or penalties, you may be tempted to continue pawning your belongings to get fast cash. If you have multiple pawn transactions going at the same time, your combined interest payments might become overwhelming, putting you deeper in debt while owning fewer material possessions.
On the other hand, if the bank won’t lend you money when you really need it, and you think you can repay a pawn transaction within the agreed loan period, a pawn shop might be your best bet. Just keep in mind that there’s some risk involved.
As for shopping opportunities, there are more than 13,000 pawn shops nationwide, and most are stocked with new and used brand name items at great prices. If you’ve got money for shopping, you might pay your local pawn shop a visit.