How Do Pawn Shops Work | Learn How Pawn Loans Work

Have you asked yourself, How Do Pawn Shops Work? We all seem to have the basic idea down but few of us have thorough knowledge of the inter workings and finite details. 

If you believe everything you see on TV and in the movies, you might think that pawn shops are shady operations that operate just inside of the law. While the popular History Channel TV series Pawn Stars has done a lot to dispel that image, some people still don’t understand how pawn shops work, and that they provide a valuable service to consumers.

Pawn shops provide short term loans to consumers who may have valuable property but are short on cash, and who don’t want to go to the bank for a loan. You can walk into a pawn shop with a piece of jewelry, a collectible, or some other item, and walk out with the cash you need to cover your short-term need. You can also sell items that you own to a pawn shop.

This is How Pawn Shops Work

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When you take an item to a pawn shop, you can usually do one of two things: you can sell the item, or you can take a loan against it. Some pawn shops are more likely than others to buy your item outright, but many would prefer to give you a loan because a loan is often more profitable. A pawn shop will give you a loan based on the value of your item, and will not check your credit score or your income. In other words, you don’t have to ‘qualify’ to get a loan from a pawn shop. You just have to have an item of value.

Getting a Loan from a Pawn Shop

Pawn shops provide what are known as ‘collateralized loans,’ which means that the person taking out the loan puts up an item of value as collateral to secure the loan. If the loan is not repaid according to the terms, the pawn shop retains the item and ultimately sells it in order to collect the amount owed.

To get a loan from a pawn shop, follow these three steps:

  1.        Bring your item into the shop for an evaluation. The pawn broker will tell you how much they can lend you against the item. If the item is rare or unique, they may bring in an outside appraiser or suggest you take it elsewhere to get a fair valuation of the item’s worth.
  2.        If you agree with the amount the pawn shop offers you, sign your item over to the pawn shop. The form you sign should tell you how much you have to pay to get your item back. This will be the amount of the loan plus the interest. Make sure you get a pawn ticket – you will need it to pick your item up when you pay off the loan.
  3.        When you have the money to pay back your loan plus the interest, bring the cash back to the pawn shop with your ticket. They will take the cash and give you back your item.

Paying Back the Loan

Paying back a loan

When you bring in your item to the pawn shop and they give you cash, you will sign a form that says that you will pay back the loan, with interest, within a certain amount of time. Many pawn shops provide loans for one to four months, but some pawn shops will give you a term of as long as six months. Many pawn shops will extend your loan if you cannot pay the entire amount back within the original term.

When you pay back the loan, you must also pay interest on the loan. Interest payments are the primary way that pawn shops make money. The interest you pay on a loan from a pawn shop may be higher than you would pay if you took out a loan from a bank. However, when you take a loan from a pawn shop, you get your money instantly, and there is no credit or income check.

Interest is usually charged on a monthly basis, so the sooner you can pay off your loan, the less you will pay in interest and the sooner you’ll get your item back. Make sure you understand the terms of your loan when you pawn your property.

What Happens if You Can’t Pay Back Your Loan?

If you cannot repay your loan within the time frame that was specified when you got your loan, and the pawn shop will not extend your loan, the pawn shop keeps your item. That’s it. Your account will not be sent to a collection agency, you will not be harassed, and your credit score will not be impacted in any way. The pawn shop will sell your item to cover the amount they loaned you.

If you cannot repay your loan by the end of the term, but you think you can pay it back within a short time, you can ask the pawn shop for an extension on your loan. You will pay additional interest on the loan, but most pawn shops will agree to extend your loan.

If your loan ends and you are unable to pay it back, the pawn shop will put your item up for sale in their shop. You could go in and buy it back, but you would have to pay the asking price, which could be more than the amount of the loan you received. This is a separate transaction from the loan, however, so the fact that you were the original owner of the item is not relevant.

Keep in mind that the pawn shop wants you to pay back your loan, and they want to give you back your item when you do. It’s more profitable for the pawn shop to loan you the money and collect the loan amount and interest at the end of the term than it is for them to try to sell your item. So if you get a loan from a pawn shop expecting to pay it back and get your item back, you and the pawn shop both have the same goal in mind.

Keep the Change

A pawn shop will not loan you the full value of your item, but if you don’t pay the loan back, the pawn shop will keep the item. The pawn shop can then sell your item for whatever they can get for it. If they get more than they loaned you, they effectively ‘keep the change.’

Here is an example. If you take a diamond bracelet worth $2,000 to a pawn shop, you may get a loan of $500. The pawn shop may require that you pay back the loan within three months, and they may charge you 5% interest per month, or $25 a month in this case.  If you take the full three months to pay back the loan, you will pay $575 after three months, and you will get your bracelet back. If you pay the loan back after just one month, you pay $525.

If you don’t pay back the loan within the specified time frame, the pawn shop can sell your bracelet and keep the proceeds. If the pawn shop sells the bracelet for $1,500, they make a $1,000 profit after figuring in the $500 they loaned you. Obviously, this is more than they would have made in interest if you had paid back the loan and collected your item. However, they might have had to wait several months – or even longer – for someone to come into the shop and buy the bracelet.

Once the term of your loan expires, you will either pay it back and get your item back, or you won’t pay it back and the pawn shop will keep your item. If you pay back the loan and your item is returned to you, you can pawn the item again if you need cash again. Some pawn shops have regular customers who may come in and take a loan against the same item several times. It’s a way for people who have irregular cash flow to get an instant short-term loan without a credit check.

Federal Regulations

Pawn Shop Federal Regulations

Pawn shops are regulated as financial institutions and must abide by the Equal Credit Opportunity Act, the Truth in Lending Act, the Patriot Act and other regulations. Any pawn shop that sells or loans against firearms must be regulated by the Bureau of Alcohol, Tobacco, Firearms and Explosives. These organizations ensure that pawn shops operate within the confines of the law and that they treat consumers fairly. They cannot discriminate against customers for any reason, and they have to disclose the terms of their loans before you sign. They will also require that you show a photo ID when you get a loan from them.

Local Licensing

Most pawn shops are also regulated and licensed by local authorities. For example, pawn shops in California must be licensed through the Secondhand Dealer and Pawnbroker Unit of the California Department of Justice (DOJ). Each state has their own regulations that govern pawn shops, but they are required to conduct their business in a fair and honest manner.

Selling Items to a Pawn Shop

Generally, pawn shops will buy items of value if you just want to get cash for your item rather than taking a loan. Gold and jewelry are popular items for pawn shops to buy. Many shops will also buy collectible items, firearms, and historic pieces. Some pawn shops have a specialty, such as antique furniture or sports memorabilia. If you have a unique item that you want to sell, look around for a pawn shop that specializes in that type of item.

Buying from a Pawn Shop

Buying Gold at a Pawn Shop

Pawn shops are a good place to shop for items such as jewelry, electronics, power tools, musical instruments, and collectible items. If you need a cordless drill or an SLR camera that doesn’t need to be brand new, you can often get a really good deal.

Since a pawn shop usually loans a percentage of the item’s value, many of these items have been obtained by the pawn shop for a fraction of their worth. This means that the pawn shop can sell the item for less than a retail store or even an antique dealer or secondhand shop. There are often very good bargains to be found at your local pawn shop.

It’s Not Hot!

Many people believe that pawn shops are a haven for stolen property. In fact, according to the National Pawnbrokers Association, or NPA, less than one tenth of one percent of merchandise that pawn shops take in is identified as stolen.

Pawn shops are careful to verify that merchandise belongs to the person who wants to pawn it, and identification is required of anyone who is seeking a loan. Pawn shops regularly provide detailed information about the merchandise they receive, and the customers who bring it in, to law enforcement, so those who would try to get a loan on stolen merchandise are likely to get caught.

Getting a loan from a pawn shop can be a practical solution for many people who may find themselves in a short-term cash crunch. Don’t let outdated ideas about pawn shops stop you from looking into the option to free up some cash for a short period of time. For more information on how pawn shops work, or to get the highest value for your pawned item, visit Monte de Piedad in one of our locations spread out through San Diego County.

Pawn shops are legitimate businesses that provide a much-needed service to consumers. They provide a way for people to get cash quickly for things that they need, whether that may be an unexpected bill, a car repair, or even new furniture or a vacation. They can also provide cash for people whose income may be seasonal, so they earn more in the summer and less in the winter or vice versa. These people may have difficulty with cash flow from time to time during the year, and a short term loan from a pawn shop may be just what they need to get by until things pick up again.