Pawn Shops

Pawn Shop
A pawn shop is an online or storefront business that offers small-dollar loans. Borrowers pledge personal property as collateral that the pawn shop holds and sells if the loan isn’t repaid. Pawn shops are often associated with predatory lending practices.

How does a Pawn Shop work?

The primary service that pawn shops offer is small-dollar loans. They also buy and sell used items, but the core of a pawn shop’s business is loans.1

To obtain a loan from a pawn shop, a borrower pledges personal property as collateral. The pawn shop appraises the property and provides a loan based on its value. Until the loan amount—as well as interest and fees—is repaid, the shop holds the property. If the borrower doesn’t repay the loan, the shop sells the property and keeps the profits.

Pawn shop loans are a type of no credit check loan. The collateral ensures that the pawnbroker will be compensated for any losses if the borrower defaults, so pawn shops don’t conduct credit checks. While pawn shop loans might be appealing to borrowers with bad credit, they come with the very real risk that borrowers will lose their collateral.

What items do Pawn Shops accept as collateral?

Typically, pawnbrokers look for collateral that will sell quickly and is easy to hold. Some common items that pawn shops accept as collateral are gold jewelry, tools, and electronics.

Pawn shops are under no obligation to accept the collateral that a borrower offers. If the item is unlikely to sell, a pawn shop may reject it and ask that the borrower pledge a different item.

How much money can I get from a Pawn Shop?

The loan amount that a pawn shop offers is based on the value of the collateral that a borrower offers. The pawnbroker will appraise the item based on its condition and how much the shop will likely receive if it’s sold. When determining a loan amount, a pawn shop may take into consideration other factors like what items the shop has in its inventory. (If the pawn shop has lots of bikes, for instance, it will offer less to a borrower who uses a bike as collateral.)2 The maximum amount that pawn shops can loan to borrowers is governed by state laws.

How much interest do Pawn Shops charge on loans?

Interest rates vary from pawn shop to pawn shop, but it is not uncommon for them to charge as much as 25 percent monthly interest. (That’s equivalent to an annual interest rate, or APR, of 300 percent.) In addition to interest, most pawn shops also frequently add fees—such as ticket fees and storage fees—to loans they provide.3

What laws and regulations apply to Pawn Shops?

Federal laws that apply to pawn shops include the Truth in Lending Act, the Equal Credit Opportunity Act, the Patriot Act, and Federal Trade Commission rules. Pawn shops that sell guns are regulated by the Bureau of Alcohol, Tobacco, Firearms and Explosives.

Pawn shops are also regulated on the state level, and laws vary from state to state.

What happens if I miss payments on my Pawn Shop loan or cannot repay it at all?

If borrowers fail to repay their loan, the pawn shop will typically terminate the loan contract and put the collateral up for sale. The collateral ensures that the pawnbroker is repaid, so even if a borrower defaults, the loan is technically paid off because the pawn shop takes ownership of the collateral as compensation. Because of this, defaulting on a loan will not affect a borrower’s credit.

References

1 National Pawnbrokers Association. Six things everyone should know before going to a pawn store. Retrieved from https://www.nationalpawnbrokers.org/2012/6-things-everyone-should-know-before-going-to-a-pawn-shop/

2 Maverick, J.B. (2015, November 24). How pawnshops make money. Retrieved from http://www.investopedia.com/articles/personal-finance/112415/how-pawnshops-make-money.asp

3 Tuggle, Kathryn. (2011, July 22). Pawn shop 101: What to know before you pawn. Fox Business. Retrieved from http://www.foxbusiness.com/features/2011/07/22/pawn-shop-101-what-to-know-before-pawn.html