You might have been cruising through town or walking through a shopping strip and noticed a pawn shop at some point. “What do they sell, anyway? Chess pieces?” Well, that is one thing they could be offering. If you’ve ever heard the term “to pawn something off”, it’s probably referring to the procurement of a loan that’s secured by a possession of value in the form of collateral. You don’t sell things to a pawn shop — rather, you lend them a good in exchange for a little cash.
Pawn shops provide a necessary service to the public, providing a means of turning just about anything of yours into quick cash in a pinch. Many pawn shops double over as trinket stores that actually sell the goods that were never reclaimed by their owners, also making them a good place to shop for oddities that may have been undervalued by the shop. They’re also a great place to pick up small entertainment goods and useful items at a low price, such as DVDs and computers. Beware though, as you may end up with something that doesn’t quite work as intended.
With that said, let’s gloss over seven points to know about pawn shops and how they work.
1. What They Do
Pawn shops are a type of collateral lender. That basically means, they’ll give you money in exchange for something that you own. However, it isn’t a “sale” in the traditional sense; you only receive a fraction of what the possession is actually worth in the form of a loan, which you’ll need to compensate (plus interest) inside of a time frame. This is functionally similar to title loans and auto pawn companies, which usually claim the title to a vehicle as collateral until you’ve compensated them of all requested dues, at which point you’ll receive the title back. If you don’t repay the loan and its interest fees, the pawn shop keeps what you handed them as collateral.
2. Their Function
Because you’re not selling the possession outright, it’s much easier to temporarily trade it for less than what it’s actually worth. This is a nifty setup that’s no doubt lucrative for the pawn shop, but it also allows people to get their hands on fast cash in an urgent situation. Then, they can pay it back later. The purpose of short-term loans with any type of lending firm is to respond quickly to an emergency with the money you need, but paying more for it later on.
3. The Payoff
You can receive a loan of any size needed, provided the pawn shop can accommodate it. You’ll generally receive considerably less for the exchange than if you sold the possession outright, but you have to consider that the object of value is only being used as collateral, not traded outright into the pawn shop’s ownership. All they’re doing is lending you money — you’re borrowing cash, not keeping it. The pawn shop also needs to account for the storage and security impact of the item that they’re claiming from you, as well as future demand for it. While it all may sound like a bit of rip-off at first, it’s actually a reasonable system where both parties get what they’re after.
4. Interest Rates: Yup, They Exist
They aren’t lending you money for nothing! As with all forms of lending, you’re expected to pay an interest rate on top of returning the original loan amount. While the exact percentage varies among shops and the localities they’re in, it’s usually less than late fees on a credit card, the cost of having a utility service reconnected, or over drafting on your bank account. You can generally expect an average 15% interest meter on loans carried out through a pawn shop. It’s worth noting that a failure to pay up on a pawn loan will not impact your credit score, unlike the aforementioned examples.
It’s as simple and straightforward as it gets: You bring the pawn shop a valid form of ID and an object of value, and they’ll hand you the cash right there on the spot. There are no credit checks or hoops of any sort to jump, including requirements of having a bank account or employment. This is another reason why pawn stores are something of an essential service to the public — not everyone can meet the requirements of bank loans to meet their own financial needs.
6. Implications of an Unpaid Loan
There are zero drawbacks in failing to compensate the pawn store of the loan. In a sense, the loan is already considered “paid off” when you hand them the collateral, so there are no strikes against your credit score or ability to use their services again in the event that you fail to pay them back on time. The only thing you lose is — you guessed it — the collateral itself. In many cases, this is entirely intentional on behalf the customer, since they see it as a quick and easy way to get rid of unwanted goods for some extra cash.
7. Contraindications of Using a Pawn Shop
You should generally avoid carrying out a pawn loan with an object of necessity if you can’t pay the loan back in timely fashion. You can expect a repayment window of 30 days, but if you flunk on the loan itself or the interest above it, the lender may be unwilling to negotiate a means of recourse. For this reason, avoid pawning off something that you absolutely need for day-to-day life.