Pawnbrokers lend money on items of value ranging from gold and diamond jewelry to household items, etc. Items such as jewelry maintain their value over a reasonable period of time. Customers provide collateral, eliminating the need to distinguish high risk from low risk borrowers.
Typically, loans are small but can reach as high as several thousand dollars depending on the value of the collateral. Contracts vary from state to state, but the average loan period is 90 days. Interest rates will vary with the amount of the loan.
The process is much the same as any other lending institution, with the primary difference being the size of the loan, the collateral and the holding of the merchandise until the interest or the loan has been repaid.
Pawnshops offer the consumer a quick, convenient and confidential way to borrow money. A customer receives a percentage of the value the broker believes the collateral would bring in a sale. Although the loan to collateral ratio varies over time and across pawnshops, a loan of about 50 percent of the resale value of the collateral is typical. In other words, pawnbrokers feel their loan is “paid in full” at the time it is made. Most states regulate pawnshop interest rates and other charges, such as storage or insurance fees.
If a customer defaults, the collateral becomes the property of the pawnshop after the loan is overdue by a specific amount of time, generally one to three months. Most states require the broker to notify by mail the owner of the pledge that he or she will lose the right to his property unless he or she redeems it within the stipulated grace period. In case of default, some states require the collateral be sold at public auction. Thirteen states and the District of Columbia require any surplus from the sale of the collateral over the amount owed the pawnbroker, including accumulated interest and any costs related to the sale, to revert to the pawn.
On average, 70 to 80 percent of all loans are repaid. Pawnbrokers offer non-recourse loans, looking only to the item being pledged to recover their investment if the borrower chooses not to repay the loan. It is the choice of the customer to repay the loan.
Less than one percent of all loans are identified as stolen goods. Pawnbrokers work closely with local law enforcement. A customer must provide positive identification to show evidence of the transaction. This information can then be presented to the police department, therefore decreasing the likelihood that a thief would bring stolen merchandise to a pawnshop. It is not in the interests of the pawnbroker to accept potentially stolen merchandise because the police can seize the merchandise and the pawnshop owner loses the collateral and the loaned money.
Pawnshops are registered firearms dealers with permanent places of business. Pawnshops must comply with all Federal (ATF) regulations as well as furnishing local law enforcement with information regarding every transaction. As registered licensed dealers, pawnshops comply with the statutory waiting periods and background checks. Federal firearms regulations require an individual to be 21 years of age to purchase a handgun and 18 years of age to purchase a long gun.
Pawnshop rates can be high, however, all lenders charge rates commensurate with risk, size and duration of the loan, collateral offered, and recourse. Pawnshop loans are small dollar, high risk, short duration loans. The item stands as the sole collateral offering no other recourse. And pawnbrokers are liable for replacement value if something happens to the item in their care.