Q:

How do pawn shops work?

A:

Quick Answer

According to the National Pawnbrokers Association, pawn shops primarily deal in secured, short-term loans where a customer's belongings are used as collateral. Many pawn shops also offer retail services and buy and resell items.

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How do pawn shops work?
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Full Answer

The National Pawnbrokers Association states that to receive a pawn loan, a customer only needs to own an item of value. There are no requirements for bank accounts, proof of income or credit checks. When an item is brought in, the pawnbroker appraises it and offers the customer a loan for a certain percentage of the item's estimated value. The pawnbroker charges interest on the loan and holds the item as collateral until the customer returns to repay the loan and its associated interest and fees.

The National Pawnbrokers Association lists the item's value, resale potential and costs of storage as factors that pawnbrokers consider when determining how much to lend. The national average for a pawn loan is $150, but loans are made for larger amounts if the value of the collateral is higher. Interest rates for pawn loans vary by state and locality. Some states even regulate the maximum amount of interest pawnbrokers may charge. A customer who does not repay the loan within a predetermined time frame is in default. After default, the pawnbroker is legally allowed to keep and resell the item that was held as collateral.

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