Pawn shops represented by a pawn chess piece

How do pawn shops work?

Pawnshops have been around for centuries, and despite popular misconceptions, pawning is a legitimate business recognised by trade laws. Merchants known as pawnbrokers run the pawnshops. They operate by either lending out pawn loans or purchasing items at a fraction of their value. Most pawnbrokers prefer loaning to purchases; some exclusively trade in loans. Loaning is much more profitable, and loanees have a certain level of credibility.

Modern pawnshops have shaken off the tarnished image usually associated with pawning, and grown into profitable high-end enterprises. Pawning is seen as an easier and quicker way to get some cash than say, an overdraft. To an extent that is true – if you have valuable items you can pawn for a decent sum. Now, here is how pawnshops work, and what you need to know before pawning.

Getting a pawn loan

First, you must have a valuable and acceptable pawning item. Usually, many pawnbrokers accept jewellery, electrical equipment, instruments, antiques and artwork. Others will even accept cars and larger goods. Really, anything that is easy to resell and store is acceptable. At the pawnbroker, you will fill out a credit information form and a credit agreement. The agreement states the loan details such as amount, duration and interest rate. Both parties can exercise flexibility on the duration and settle on an agreed period of up to six months. The pawnbroker will issue a pawn receipt for the transaction summarising the loan and item particulars.

Whether you are pawning for a loan or to sell an item, always prepare substantial evidence to prove to the pawnbroker that you own the item. You may be required to show a receipt or other documentation to this effect. This is, of course, to make it challenging to pawn stolen goods.

Repaying a pawn loan

The broker keeps the item as security and gives you a fraction of its value as the principal. Usually, the broker offers a 14-day grace period in which you can cancel the agreement and only pay the accumulated interest. In a typical scenario, once you have paid the total sum including the interest within the stipulated period, you can redeem your item using the receipt. Otherwise, the pawnbroker has the right to resell it to recover the loan.

Pawn loan repayments are often flexible; most businesses allow regular, erratic or lump sum payments as long as they fall within the loan period.

What to watch out for

Pawning seems like an ideal solution to balance personal finances or deal with a cash emergency in a quick fix. However, don’t jump into the first deal that comes along; you need to watch out for some red flags and hidden details. Remember, at the end of the day, the pawnbroker is there to make money whether you pay back the loan or not.

You will often find a very similar checklist on several money blogs: the most reputable pawnbrokers are members of The National Pawnbrokers Association because they adhere to a proper code of conduct and regulations. Shop around for the best rates and value for your item. Read carefully and understand the pawning agreement; take note of details like additional fees, period extension, and consequences for late payments. You might be surprised just how differently some shops conduct their business.

Written by Molly Hugo

Copyright Io4 UK Limited

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