What exactly IS a Pawn Shop?
A pawn shop is a hybrid between a bank and a resale store. Simple enough.
Pawn shops act as a bank by making their customer’s cash loans. A pawn shop loan is a collateral loan, meaning the pawn customer must present an item to be pledged until the loan is repaid.
Collateral can be anything of value to the pawn shop. Banks use collateral too. Banks use houses or vehicles, businesses, etc.
Pawn shops use smaller items in most cases like jewelry, tools, electronics, firearms, musical instruments, etc. Click here for a detailed list of What do Pawn Shops Buy.
So we now know WHAT a pawn shop is, so let us get into how they work.
The Pawn Industry
The pawn industry has been around for centuries. Long before credit checks or credit scores, people were loaning other people money based on a certain item they found valuable. A tool, a weapon, a horse, beads, beaver pelts, you name it!
This is basically the same premise in which pawnbrokers today operate a pawn shop.
The pawn shop will evaluate your item and determine what it is worth to their end customer. Once that value has been established the pawnbroker will offer you an amount lower than that predetermined value.
Why is it lower? In case you default on the loan and do not come back. The pawn shop needs to resale the item higher than they made the loan for in order to recoup and make money.
According to the National Pawnbrokers Association, the national average of a pawn loan redemption is 75-80% which means most people pick up their items.
Upon pick up of their items, the customer will repay the amount financed and a predetermined amount of interest.
This interest is how a pawn shop makes the majority of its monthly cash flow.
Who determines the Interest on a Pawn Loan
States in which the pawn shop is located set the pawn loan interest rates. So the interest rate can fluctuate from state to state.
Just like the banking industry the pawn industry is highly regulated.
For the 20-25% of the items that are not picked up by the pawn customer for whatever reason, are then resold by the pawnbroker. Once again, the pawnbroker is hoping to resell the item for MORE than the initial amount loaned in order to make a profit.
So most pawn shops have a storefront in which to resale their goods. A pawn shop also acts as a resale shop or thrift shop, selling gently used goods.
Most pawn shops also offer new items to go along with their selection of used merchandise.
The resale side of the business is the secondary income from a pawn shop.
So that is how pawn shops work and how pawn shops make money. A simple, effective business model that has filled a consumer need for centuries.
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