Everything you think you know about pawn shops is wrong. Most are not sketchy companies staffed by scammers who trade in stolen goods. Nor are they usually in the business of mining big dollars for rare collectibles such as the crew at Las Vegas’ World Famous Gold & Silver Pawn Shop, the store at Pawn Stars.
Instead, pawn shops find themselves in the clearly non-glamorous but useful business of borrowing small amounts of money – an average of $ 150 to people who need cash. The industry serves millions of people every year, but if you’ve never entered a pawn trade, the whole process probably seems a bit mysterious. To clarify the confusion, we spoke to a pawn industry expert who helped us with some of the great truths about pawn shops, how they work and who they serve.
Many pawn shop users have had bad experiences with traditional banks
Not only are many pawnshop users unemployed and are probably looking for an easy way to scoop up some cash, but they have also had bad experiences with traditional banks that could push them to pawn shops.
“We find that about three-quarters of our users personally or a close friend or loved one with a hugely negative experience at a bank. That’s 40% higher than the national average,” Birnholtz said. Of the PawnGuru users who do have bank accounts (and many do not), they have twice as much chance of being red or paying other bank charges. That suggests that traditional banks are not doing well to meet the needs of certain consumers and that pawnshops are entering to fill the void, according to Birnholtz.
“People are turning to an alternative lending and financing system because it’s very difficult to keep your money and build up your assets with a regular bank if you have a low income,” he said. “There is a very high level, early on in the pipeline problem with how people save and open their money in the US. I think this puts people in situations where they are more financially insecure and I think they turn to things like payday as a result loans, pawn shops and other financial emergency services. “
Most people get their items back
Pawning an item does not mean that you have to kiss it goodbye forever. The idea is that you will eventually pay back the borrowed money (plus interest and costs) and then get your guitar or watch back. And that is exactly what usually happens. Eighty-five percent of pawnshop customers eventually recover the item they have pledged, according to the National Pawnbrokers Association. Compare that with flash loans, where one third of borrowers are in default within six months of taking out their first loan, according to a survey by the Center for Responsible Lending.
Pawn loans aren’t cheap
Pawn shops have some advantages over other ‘lenders of last resort’, such as flash credits, but that doesn’t mean they are cheap. Interest rates (which are usually regulated by the government) can range from 30% to 300%, according to Bankrate, and some stores will switch to additional fees or service charges. If you have another way to borrow money, such as a credit card or personal loan, it is probably cheaper than pawns. The disadvantage of more traditional loans is that you have to borrow decent credit. And if you cannot repay your loan, your credit score will suffer.
You should know your item’s worth
Before you try to pledge anything, it helps to have an idea of what it’s worth. (And we mean what it’s really worth, not its sentimental value.) Whether it’s investigating how many similar items have been sold on eBay or taking your jewelry to an appraiser, knowing the value of what you’re trying to pledge gives you a baseline to work from. Just don’t expect you to come close to the actual retail value. A pawnshop must make a profit if you don’t return to claim your item, so it offers you a loan of only a fraction of what it thinks the item can sell later.
“You will get a little less than what it closed on eBay because you are basically paying for liquidity,” Birnholtz said. “You get your money today, you reduce the hassle and that is part of the advantage that a pawnshop offers”
Pawn offers vary — a lot
In a perfect world, every pawnshop would offer to lend you about the same amount of money for the same object. In reality, that’s not how it works. The average difference between the highest and lowest bids for the same item at different pawn shops was 258%, according to data collected by PawnGuru in 2015.
That huge inequality in loan offers was one of the reasons why Birnholtz created PawnGuru. Instead of spending an afternoon visiting different pawnshops to get the best deal (or unwittingly settling for a lowball offer), people can now go online, share the item they want to pledge (or sell immediately) and get quotes from local pawnshops. “That gives people the ability to negotiate with multiple stores at once to find out which is the best deal for them,” he said.
Pawn shops aren’t as scary as you think
Pawn shops do not have the greatest reputation. In the minds of many people, they are shady and a little scary, run by creepy-looking boys, and filled with desperate customers. But according to Birnholtz those stereotypes of the pawnshops are not grounded in reality.
Pawn shops are “not the happiest place on earth,” Birnholtz admitted. But the industry has cleaned up its act in recent decades. “I think the level of professionalism, cleanliness and service in the pawn industry has improved dramatically over the past 30 years.”
Go to a pawnshop today and you’re probably in a clean, well-lit store, full of used quality items. Some even turn to Instagram to sell their luxury goods. And the idea that pawn shops are filled with items of dubious origin? It’s just not true, according to industry groups, who say that less than 1% of the items that people try to pledge appear to have been stolen. Legitimate pawnshops check ID and cooperate with law enforcement to ensure that the things they sell are not stolen property.
Pawn shops are a financial lifeline for some
While people from all walks of life use pawnshops, they are especially popular with people outside the financial mainstream. More than a quarter of US households are, according to the Federal Deposit Insurance Corp, a bank or sub-bank, and these families rely on services such as payday loans, car loans, rent-to-own stores and check cashing, for all or some of their daily financial transactions . Forty percent of these households have also used pawn shops, according to the National Pawnbrokers Association.
The pawnshop loans are an attractive proposition for people on the financial side for a number of reasons. Not only can a pledge be obtained without a credit check, but the debt is relatively low risk. If you cannot repay your pledgee, you will lose the item, but you will not receive a black spot on your credit report. Compare that with high-interest flash credits, which consumers can easily catch in a spiral of debt.
“People wouldn’t need pawnshops to make ends meet in an ideal world. But it’s a much better alternative for a low-income person or a person without a bank account with a financial emergency than a lender,” Birnholtz said. “It is rotten to lose your item, but it is much better than being imprisoned for years in a row and [being stuck with] thousands of dollars in difficult, hard-to-understand costs.”