If you’ve found yourself needing some quick cash recently, you may have considered heading to a pawn shop. You’re not alone. The bad economy has prompted many people to visit a pawn shop for the first time. “We are seeing more people who have never been in a pawn shop before looking for short term solutions without having to sell the farm,” says Rick Harrison, whose family owns the Gold & Silver Pawn Shop in Las Vegas and stars in The History Channel series Pawn Stars.
(Note: a pawn shop can also be a great place to find bargains, especially on stuff like electronics and jewelry.)
Here’s how a pawn shop transaction works:
Getting the Loan
- Pawn shops offer collateral-based loans – meaning, loans secured by something of value. You bring in one of your possessions, and if the pawnbroker is interested, they will offer you a loan. The pawnbroker then keeps your item until you repay the loan. Warning: the loan amount will likely be a small fraction of the item’s actual value.
- You could also sell your item to the pawn shop outright, but pawnbrokers are less enthusiastic about these types of transactions because loans offer much more profit potential for the pawnbroker.
- Along with the loan, you will receive a pawn ticket. Don’t lose this! Not only is it the receipt for your item, but it also summarizes the terms of your loan: fees, expiration date, description of your item, etc.
Repaying the Loan
After getting the loan, you have two choices:
- Return to pay the balance – including loan amount plus all added fees – before the deadline, which is usually one to four months after the initial transaction.
- Don’t return, and the pawn shop keeps your item. Aside from losing your belonging, there are no other consequences (the pawn shop doesn’t pursue any type of collection action, and there is no affect on your credit report). On average, though, 80% of all customers do reclaim their items, according to the National Pawnbrokers Association.
In some locations, you can extend the loan period by up to several months, but you’ll incur additional charges that can really start to add up.
The Interest Rate Explained (Sort of)
The dollars and cents of pawn shop loans get a little complicated because: (a) rules regarding the fees vary widely from state to state, and (b) it’s not just a cut-and-dry interest rate.
“The term ‘interest rate’ can be very confusing, so I will speak in terms of total allowable ‘finance charge’,” says Stephen Krupnik of South Bend, Indiana, creator of the Pawn Shop Advisor coaching program and author of the book Pawnonomics. “Pawn shop loans are nearly all state regulated, and finance charges can vary from 5% per month to 25% per month. Here in Indiana the ‘interest rate’ is capped at 36% APR or 3% per month, but pawn shops can charge an additional 20% per month service charge, making the total allowable ‘finance charge’ 23% per month.”
In New York, meanwhile, the maximum interest rate is 4 percent per month, along with a service charge of up to $10. The interest rates may seem steep, but NPA spokesman Emmett Murphy says these aren’t meant to be a substitute for bank loans. “These are what we call ‘safety net loans’ and are usually for life emergencies, such as buying groceries or putting gas in the car.” The typical fee, he adds, is often lower than the cost of a bounced check or a disconnected utility – costs often incurred by people with an unexpected money crisis.
To learn the maximum rates allowed in your area – along with any rules regarding pawn shop transactions – check your state’s website (most likely, the information will be in the consumer protection section).
The bottom line: make sure the pawnbroker clearly explains all the fees involved in your loan before you finalize the transaction. These terms should also be listed on your pawn ticket.
What Pawn Shops Do – and Don’t – Want
When considering pawning something, keep these tips in mind:
Don’t: offer anything outdated, difficult to store or cheaply made, Krupnik advises.
Do: go with jewelry or coins, Harrison suggests. Other good choices, according to Krupnik, are firearms, high-quality tools and musical instruments.
Be Prepared for Red Tape
The pawnbroker is legally obligated to confirm you are the legal owner of the property. “They will ask you enough questions about your property to become comfortable with the fact that you own it,” says Krupnik. “Do not be offended, the pawnbroker is just trying to make sure that both you and the property are legitimate. Also, if you do business with the pawnbroker expect to have to show a government issued ID. It is required by law.”
(This is a story I originally wrote for Bankrate.com)