Most people think of pawn stores as a way to make cash quickly or a place to buy an inexpensive ring. In reality, they're a lot more complex than simple buy-and-sell transactions. Here are 10 things to know before walking into one and speaking with a pawnbroker.
- You're usually not selling your items. Pawnshops are often compared to consignment stores where people bring their items, sell them to the store owner and walk out with cash. In actuality, pawnbrokers issue collateral loans where they grant money based on a percentage of your item's value. You have a set amount of time to pay the loan back, after which the pawnbroker gets to keep your item and sell it if he or she chooses.
- Pawnshops have to follow the law. It seems like a simple statement, but pawnshops have a reputation of being seedy businesses where questionable practices take place. Thankfully, however, they're bound by various state and federal laws, including the Truth in Lending Act, the Equal Credit Opportunity Act and the Fair Credit Reporting Act. Additionally, the National Pawnbrokers Association has members follow its own code of ethics, the first of which is to, "strive to conduct business in such a manner as to enhance and promote the positive and professional image of all pawnbrokers."
- Your credit isn't affected. Even if you default on the loan, your failure to pay isn't reflected on your credit report. This is because the pawnbroker is granted your item in return, so the debt is considered paid in full. In addition, a collateral loan could save you from the negative impact of overdraft or late credit card fees.
- You can sell to a pawnshop. It's easier for pawnbrokers to profit by issuing loans as opposed to making sales. It is possible to sell your items directly, but keep in mind that your broker might be much less agreeable in this case.
- Pawnshops generally have high interest rates. Many people recommend using pawnshops and collateral loans as a last resort because of the interest rates. You'll generally incur less in annual credit card interest than you will from a monthly collateral loan.
- Pawnbrokers design loans to make a profit. You won't get the current retail value for any item you use as collateral. The broker will take this into consideration, but he or she will only issue you a loan based on a percentage of that value. They want to profit off the interest you owe or, if you don't pay the loan back, sell the item at a price that attracts other customers and guarantees a sale.
- It's best to sell new or valuable property. Timeless items like gold, silver and jewelry will bring you more money than an electronic device that's a few years old. Pawnbrokers can easily profit off these, so they're more likely to offer you a bigger loan.
- You have to prove who you are. Pawnbrokers can't grant you a loan if you aren't the legal owner of the property in question. They might make several inquiries into who you are and how you acquired the item. They'll also ask to see a form of identification.
- All you need is a government ID. Aside from any necessary, item-dependent documents such as a gun license, all you need to pawn your item is a form of government-issued identification. Your credit score doesn't affect the terms of your loan.
- You should only pawn what you're willing to part with. Even if you fully intend to pay back your loan, life doesn't always go the way we intend. Pawning an item that holds emotional significance could result in you having to relinquish something you truly cherish. While the majority of people buy their pawned items back, there are a handful - 15 percent - who don't.
Pawnshops are one of the fastest ways to receive a loan, and they help people make last-minute or unexpected payments. They don't alter your credit score, although they can come with high interest fees. It's up to each person to weigh the pros and cons and decide if a pawnshop meets their needs.