How Do Pawn Shops Work?

Chances are, you’ve seen a movie or TV show that includes a scene with a shady pawn shop. No doubt, this has led to a negative image of these businesses. Today’s pawn shops are not usually disreputable, but you do need to use care if you decide to do business.

What Are Pawn Shops?

Pawn shops are essentially businesses that offer collateral-based loans to consumers. If you have an item of value, you could take it to a pawn shop and use it as collateral for a loan. The loan you get won’t be the sum total of the item’s value. Instead, the pawn shop will offer you a loan and you will have to pay back the loan with any fees and interest before the instituted deadline.

Pawn shops succeed because of the low risk for the loans they offer, and because the loans are typically very short term. The collateral received for the loan amount is much higher in value than the loan amount. If the customer defaults, the value of the item more than makes up for the loss from the defaulted loan.

The Pawning Process

You enter a pawn shop with your valuable item, perhaps an expensive piece of jewelry or a rare coin. The pawn broker appraises the item and offers you a loan with terms that probably include a relatively low interest rate, loan origination fees, a deadline for repayment and mention of forfeiture of the item with default. The pawn broker takes possession of your item and you get the money and a pawn ticket that serves as your item receipt. When you finish repaying the loan in full by the deadline, you present your ticket and get your item back. If you don’t repay by the deadline, you forfeit your item. There are no other collection actions taken by the pawn shop.

Laws Regulating Pawn Shops

Pawn shops are subject to federal laws that govern financial institutions, states Pawn Shops Today. These laws include the Truth-in-Lending Act, the Patriot Act, Trading with the Enemy Act, the Bank Secrecy Act and provisions regarding privacy in the Gramm-Leach-Bliley Financial Services Modernization Act. Pawn shops also have to adhere to IRS regulations that require them to report some cash transactions.

A 24-Hour Pawn Shop

If you find yourself in a bind and strapped for cash, you might look for a 24-hour pawn shop to get a quick loan. Be prepared to prove that you’re the legal owner of the property you plan to pawn. This will often involve a number of questions that only the property owner would know. You’ll also have to have a form of government-issued identification to show the pawn shop, advises Bankrate.

Finding Pawn Shops Nearby

Finding pawn shops nearby your home is relatively easy, especially in medium-to-large cities. The National Pawnbrokers Association has a search function you can use to find a pawn store near you that is a member of this professional association. Enter your zip code into the search tool and peruse the pawn shops located in your area. As you look for a pawn shop to use, check specific shops with your local Better Business Bureau to see if consumers have had problems with a pawn broker.