There has always been one problem that people around the world have faced from time to time - the need for quick cash. For almost as long, pawning personal property for a cash loan has been the easiest way to solve the problem.
For centuries, pawnbrokers have exchanged valuable items for loans. The items are then held by the pawnbroker for a period of time over which the owner of the items can pay back the borrowed money, plus interest. Brokers have the right to sell the item to another buyer if a buyer does not come up with the money to buy the item back.
Today, more than 12,000 pawn shops operate nationwide, their shelves filled with articles ranging from the mundane to the outrageous. There is a story behind each of them.
The First Pawn Shops
In Ancient China, pawn shops first emerged as a way of granting short-term loans to peasants more than 3,000 years ago. The majority of pawnbrokers operate through pawn shops, though some operate independently. The ancient Greeks and Romans used slave trading to open small shops, giving merchants a way to start a business.
A couple of restrictions were placed on charging interest by the Catholic Church during the Middle Ages, making pawn shops less popular. The rules on short-term credit were relaxed in Europe in the 14th and 15th centuries since it became a popular means of financing business enterprises and providing assistance to the poor. Money-lending families, such as the Lombards and Medicis in England, were prominent in the Middle Ages. Queen Isabella of Spain reportedly put up her jewellery as collateral to finance Christopher Columbus' voyages to the new world, similarly to the way King Edward III pawned his jewels to the Lombards in order to help finance the war against France.
Pawn comes from the Latin word patinum, which means cloth or clothing. Most working-class people owned clothes as their most valuable possessions. Despite the majority of pawn shops being privately operated, some public pawn shops were established as charitable funds in Europe in the 18th century, offering low-interest loans to the poor to help them get out of debt. During the 19th century, pawning clothes on Monday and retrieving them on Friday - payday - was a common way for the poor to get through the week.
During this era, it was more likely for people seeking quick cash to come from the margins of society, so measures were put in place to prevent the pawning of stolen items. In 1872, pawnbrokers began to be protected from selling the stolen property due to the Pawnbrokers Act. Moreover, the act stipulated the amount of interest that could be charged on the pawned items, as well as layout overall guidelines for the industry, establishing a pattern of regulation that continues to this day.
What are the economics of running a pawn shop?
The Pawn Shops make money through loans, retail sales, and auxiliary services, such as money transfers and cell phone activations. Standard business models for pawn shops generate income from loan interest and profit from retail sales. In general, pet shops aim to generate net profit margins of at least 15% to 25%.
Providing Personal Loans
As a pawn shop makes loans and earns interest on the balance of those loans, revenue is one of its main sources. In a pawn shop, an individual takes back control of an item as collateral for a loan. Typically, items like televisions or computers serve as collateral. When a pawn shop lends money, it is primarily determined by the item's value, but its inventory at the time of the loan can also make a significant difference.
In the case that a pawn shop has plenty of identical televisions in its inventory, it will typically offer a person significantly less money than if the pawn shop possessed a low inventory of televisions.
Retail sales make up the second primary source of income for pawn shops. In addition to items the pawn shop purchases outright from individuals, it also purchases items pledged as collateral by customers who defaulted on their loans and forfeited the pledged collateral property to the pawn shop.
There are some outright purchases at pawn stores that they will offer more money for than the items they will lend against since they know they will be able to make a profit on the resale of the items. Depending on the items acquired from defaulted loans and the length of time before default, the shop may make higher or lower profits depending on the items acquired.
By collecting the interest payments made prior to default on a loan that was maintained for a long time, the pawn shop may have already made a profit. The length of time may, however, also indicate that the item's value has degraded to the point where its resale value is minimal or even nonexistent.
What do pawn brokers do?
- Essentially, you hand over the item (called a pawn or pledge) to the pawnbroker for them to value.
- When you're a new customer, the pawnbroker should give you a 'Pre-contract Credit Information' form - if you've borrowed from the place in the past 3 years, you can ask for that (and doing so is the best course of action).
- An agreement for credit will have to be signed. Read the agreement carefully and ask questions if anything is unclear.
- How long and how much the loan will cost will be specified in the contract. The minimum period of time will typically be six months (but you can agree to a shorter or longer period).
- A pawnbroker may provide you with a separate pawn receipt, unless it is part of a credit agreement, which you must keep so that you can prove you own the item.
- Paying what you owe and getting back the item is all it takes to redeem a pawn. In the event that you fail to repay the loan during redemption, the pawnbroker will sell it to recover the money.
If you decide not to go ahead with the transaction, you have a fourteen-day cooling-off period, which allows you to withdraw from it and just pay the interest from the date you signed the contract up until the date you decide not to go forward.