How Pawnshops Work

Have you ever been to a pawnshop? For a lot of people, there seems to be something, well, shady about these places. But if you haven’t been to a pawnshop, you may be missing out on some great bargains. A pawnshop is a lot like a dozen garage sales and a flea market all rolled into one. Pawnshops also play an important role in many communities by providing people with an easy, fast way to borrow small amounts of money.

There are three things that happen in any pawnshop hundreds of times every day:

  • People borrow money by putting up something they own as collateral.
  • People sell used merchandise.
  • People buy new and used merchandise.

What’s the Deal?

Pawnshops and pawnbroking have been around for thousands of years. The basic idea behind any pawnshop is to loan people money. It goes like this:

  1. You bring in something you own and give it to the pawnbroker as collateral for a loan (this act is called pawning).
  2. The pawnbroker loans you money against that collateral.
  3. When you repay the loan plus the interest, you get your collateral back.
  4. If you don’t repay the loan, the pawnbroker keeps the collateral.

How Much Will You Give Me

To try this out, Someone went to Rick’s Pawnshop and asked, “How much will you loan me for my wedding ring?”

It’s a nice wedding ring — a standard gold ring with my wife’s name and our wedding date engraved inside. Bought new in 1994, the ring cost about P5,000.

Your jewelry might hold special value to you, but you’d be surprised to learn of what little value it is in a pawnshop.

The answer was, P1,000

In return for pawning my wedding ring, I would receive P1,000 and a pawn ticket. The ticket would indicate the following:

  • The item that I pawned
  • The amount of money loaned to me for the item
  • The amount of money due in 30 days to get the item back

My ticket would tell me that, for my wedding ring, I received P1,000 and that I need to pay P1,100 (that’s additional 10% interest on my P1,000) in 30 days to get the ring back. Within 30 days, I have three options:

  1. I can return to the pawn shop and pay the full amount (P1,100 in this case) to retrieve my wedding ring.
  2. I can return to the pawn shop and pay the monthly fee (P100 in this case) to extend my loan for another 30 days.
  3. I can do nothing, in which case the pawnshop keeps my ring and sells it.

That, in a nutshell, is the basic pawnshop transaction. In a busy pawnshop, that sort of transaction happens hundreds of times every day. In many communities, the pawnshop is pretty much the only easy way to borrow small amounts of money. If you need P1,000 to make it through the week to your next paycheck, where are you going to get the money? A bank is not going to touch a small loan like that, and even if it did it would take a week or two to process the application. A pawnshop is a quick, easy way to get a loan.

Of course, P100 fees due in 30 days for a P1,000 loan is a pretty steep rate. That’s 120 percent per year!

A typical item pawned at a pawnshop has about a 60-percent chance of being reclaimed by the person who pawned it. This means there’s about a 40-percent chance that the pawnbroker will have to sell the item to recover the loan, so the item must be in a condition to be resold.

Unlike someone running a garage sale or a booth at a flea market, a pawnbroker is running a stable business in the community and has to worry about his or her reputation. A pawnbroker cannot sell junk.

Smart Business

From the pawnbroker’s standpoint, a pawnshop is simply a business. According to Ausley, a pawnbroker, the idea is to “loan out about one-third of what I think I can get for the item when I sell it.” If an item is priced at P5,000 new, and the pawnbroker thinks it will sell for P3,000 used, then the loan amount would be P1,000. The pawn ticket for this item would ask for P1,100 (10% percent interest) in 30 days.

Part of the art of being a pawnbroker is having a sixth sense about how much things are worth both new and used. As an experienced pawnbroker, Ausley gets most of his information about prices by walking around stores and looking at catalogs, and also by talking with other pawnbrokers. The real experience comes from buying and selling things every day. He’s been in the business for 15 years.

Electronics are a special problem. The prices for new electronics are falling constantly, meaning that used prices are also falling. When the economy is down, lots of people are pawning things and not many people are buying. This helps to explain the high interest rates to some extent. The pawnbroker has real cash going out the door when he makes a loan, but has only the used merchandise to sell to recover that money if the loan is not repaid. Used merchandise is not the Rock of Gibraltar when it comes to investment vehicles.

“An ideal customer is someone who comes in and pays the interest every 30 days, or picks up their item every month and repawns it if necessary,” says Ausley.

Incredible Bargains

Because many of the people never pick up the items they pawn, a pawnshop is a consumer store as much as it is a lending institution. People also come in and sell used items outright to the pawnshop.

This makes any pawnshop a huge, daily garage sale! Some of the things you typically find in a pawnshop include:

  • Jewelry
  • Electronics
  • Tools
  • Musical instruments
  • Other valuable items

According to Ausley, “a pawnshop is a great place to buy jewelry!” You generally pay about half the retail value. Worried about authenticity? Bring an appraiser with you. Since jewelry is often the most valuable thing a person owns, it is one of the most commonly pawned items. Anything of value that you can find at a garage sale is probably for sale at a pawnshop near you.

For more information, contact:

Chamber of Pawnbrokers of the Philippines (CPPI)
Tel: 740-0047, 749-8740, 732-5151 local 213.

source: money.howstuffworks.com, photo from pep.ph

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