How Pawn Shops Work

Ok, so you hit a financial snag and you need to get your hands on some quick cash. Your credit cards won’t cover it and your family and friend loan privileges are non-existent.

Looking around the house, your eye falls on the trumpet your son begged for and began neglecting a month after he got it. You’re now considering taking it to a pawnshop to see what you can get for it.

Before you make that decision, it’s a good idea to learn how pawn shops work.

These Are Loans

When you show up with the trumpet, the pawnshop operator will consider it as collateral against a loan they’re making on your behalf. You’ll be expected to return to reclaim the trumpet at some point in the future; unless you sell it outright—of course.

In essence, the trumpet is collateral for the loan, the same way your house is security for your mortgage and your car backs the loan you have against it. Keeping the item enables the pawnbroker to feel OK about making the loan without a credit check, bank account or co-signer.

Items favored include fine jewelry, guns, musical instruments, contemporary electronics and high-end photography equipment. And yes, you will be required to prove you own the item legally. You must also be at least 18 years of age to legally sign the loan agreement and show a valid form of government identification.

Repayment Terms

The loan period varies from shop to shop—as does the interest rate. Most terms run between 30 and 120 days. Extensions are sometimes granted—at an additional charge.

The interest rate varies, but can run as high as 180 percent annually. However, pawn operators rarely talk in terms of interest rates. Instead they have “fees” or “finance charges” based upon the length of time required to retrieve the item.

With that said, if you borrowed $100 for 30 days and those fees totaled $10, the annual percentage rate would be the equivalent of just under 122 percent.

The Pros & Cons

On the upside, you’ll get the money on the spot, with very few questions asked. If you have an item of value and can prove ownership, you’ll get the money—period. If you can’t pay, you simply leave the item behind and the pawnshop operator will sell it to satisfy the loan.

Because they will profit handsomely off of your item, they won’t consider this to be a default on the loan and will not report it to credit agencies. In other words, your credit score won’t suffer, even if you never return.

On the downside, the amount offered will be a fraction of the item’s value. If you think you can take a $10,000 watch to a pawn shop and get $10,000 against it, you’ll be disappointed. In most cases, you’ll be fortunate to get 25 percent of the value of the item.

And, of course, there’s that aforementioned stratospheric interest rate that will be imposed to get it back.

So, Are Pawnshops a Bad Idea or a Good Idea?

Like so many things in life—it depends.

If you need cash fast, have an item of considerable value and no other choice; you have to do what you have to do. On the other hand, if you don’t plan to retrieve the item and can wait seven days to get the money, you can usually sell it on eBay for more cash than a pawnbroker will offer.

If you find yourself continually in need of the services of a pawnshop to make ends meet, you should examine your finances to see where the problems lie. If it’s a case of overwhelming debt, working with a company like Freedom Debt Relief could help you settle many of your obligations for less than you owe to help you get your situation back on track.

Either way, understanding how pawnshops work before you consider using one is the best way to arrive at a sound decision.

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