Pawnshops provide cash in a pinch
Pawnshops have a major
problem, and it's all in your head.
Mankind's first form of lending, dating back some
3,000 years, has been eclipsed by formal banking only relatively
recently, roughly beginning in the Renaissance. That's a lot of
shady pre-banking history, usurious practices and unsavory reputations
But that's just what this fiercely independent financial
industry has undertaken in a big way during the past decade. Pawnbrokers
note that last year alone, they provided $4.3 billion in very small,
much-needed, short-term loans. Still, they get no respect.
Their biggest challenge is correcting the numerous
public misconceptions about the pawnbroker's trade and its role
in society. It's not an easy job. Much of the misinformation is
based on fear and ignorance rather than firsthand experience. People
who have never needed a pawn loan, much less set foot in a pawnshop,
often denigrate the entire industry on principle alone.
A changing, regulated industry
Tom Sams, who heads up the Florida Pawnbrokers Association
in the state with the most pawnshops (more than 1,300), says the
lingering negative stereotype no longer widely applies.
While Sams readily admits that the old image was one
"that pawnbrokers earned actually," he points to the transformation
of today's operations.
"The pawn industry is going through a metamorphosis,
with changes in both how they serve their customers and the quality
of the stores themselves," he says. "Cash America, Value
Pawn and other large firms came in with bright, beautiful stores
and that is forcing a lot of people to do the same thing, to clean
up their act and bring their pawnshops into the same quality as
other retail establishments. We see major changes coming through
this industry, along with the fact that we are a financial institution
Indeed, the federal government now classifies pawnshops
as non-bank financial institutions. That puts them in a rather precarious
gray area of overlapping federal, state, county and municipal rules
and regulations that have become increasingly cumbersome, from both
a compliance and enforcement standpoint.
Pawnshops get hit both ways. They must make a detailed
report of all transactions to various law enforcement agencies on
a daily basis, yet must fight, sometimes in court, to protect their
customers' rights to privacy from those same agencies. Other financial
institutions are protected under federal right-to-privacy legislation.
How the process works
Bob Benedict, director of the Dallas-based National Pawnbrokers
Association, agrees that pawnbrokers are widely misunderstood.
"The high interest rates always bother some people,
but they're high because their expenses are high," he says.
"The cost of security alone would make most business people
cringe. Their insurance rates are extraordinary; you would not believe
it. And they obviously have to hire employees they can trust because
they're handling money and merchandise all the time."
If you're lucky, you'll never need a pawn loan. But
here's why you should be glad they exist.
Most of us understand the basic principle behind a
pawn loan: you put up something of value, most often jewelry, a
firearm, a consumer appliance or a musical instrument, as collateral
for a cash loan.
The pawnshop agrees to hold it for a period of time,
usually from 30 to 60 days, at which point you must pay the pawnbroker
back with interest and fees, ranging anywhere from three-to-25 percent
of the loan amount.
If you don't redeem your merchandise within the grace
period, it becomes the property of the pawnshop, which then attempts
to sell the item.
Popular pawnshop misperceptions
Once you get beyond the process of pawning an item, the
facts stop and the fallacies begin. Here are 10 popular misconceptions
1. Pawnshops charge exorbitant
fees. Pawnbrokers are the first to admit their interest
rates and fees are high. But, they note, they have to be. Ever
wonder why you can't borrow $100 from your bank? It's because
it costs a bank just as much to process a $100 loan as a $5,000
loan and bankers flat-out won't do it. Add to that a pawnshop's
overhead, including the cost and training of knowledgeable, trustworthy
employees and gemologists, administrative time for reporting
to law enforcement and the hefty insurance premium to cover the
valuables on premises, and that 25 percent figure starts to sound
2. Pawnshops charge whatever
they can get. Not so. Pawnshop rates and fees are carefully
regulated at the state level.
3. Most of the goods in
pawnshops are stolen. Actually, because they are required
to report every transaction to law enforcement, very little stolen
merchandise winds up in pawnshops. A pawnbroker who accepts stolen
goods runs the risk of losing both the loan amount and the merchandise.
"We know for a fact that the maximum amount of stolen property
in pawnshops is one-tenth of 1 percent," says Sams.
4. Pawnshops cater to thieves.
Maybe years ago, but not anymore. Today, pawnbrokers are required
to fill out identification reports on every item they accept as
collateral, and many require thumbprints and even take photographs,
hardly an inviting atmosphere for thieves.
5. Only the poor use pawnbrokers.
In fact, a study by Georgetown University found that the average
income for people who do business with pawnshops is roughly $34,000.
Customers tend to be equally divided between men and women.
6. Pawnbrokers gouge you.
Sams says most pawnbrokers will offer you about half of what they
would expect to sell your merchandise for if they end up with
it, which usually works out to be a quarter of what you paid for
it new. But remember, this isn't a garage-sale proposition; you're
only putting it up as collateral.
7. Pawnbrokers keep your
stuff. Not true. Nationwide, roughly between 70-to-80 percent
of all pawned goods are reclaimed.
8. Pawnbrokers want to keep
your stuff. Au contraire, says Sams. "You do everything
you can trying not to take the pawned stuff off the person,"
he says. "You want them to get it back. Our interest is in
interest; we want to be a lending institution. We know that we're
going to end up keeping some of it, but do we want it? No, we
9. Pawnshops lead people
into bankruptcy. Actually, pawnshops may be the one financial
institution that the unbanked can still turn to for the short-term
cash to stay afloat. "A pawnbroker never, ever causes bankruptcy
because people are able to give up an item for a period of time
that they can do without anyway, so you're never financially into
a pawnshop for long-term debt," says Sams.
10. Pawnshops attract a
bad element. Again, outdated. The trend today is toward
well-lighted stores, professionally dressed employees and retail-quality
displays. While pawnshops are far from being considered an asset
to neighborhood property values, they are not the blight on the
landscape they once were. Some pawnbrokers have even followed
car dealers in adopting a no-haggle policy on their merchandise
in a further attempt to blur the distinction between their business
and traditional retail stores.
A heart in hard times
Despite a checkered past and lingering bad reputation, the
pawnshop industry views itself as providing a vital community service:
small loans on demand for folks who may be too proud to ask relatives
or friends for a handout.
"Today, any little thing can occur to upset the
income of a normal family," says Sams. "One little thing
like Johnny falling and breaking his arm, the hospital is not going
to serve them unless they have insurance or you pay in advance.
It could be as simple as a prescription, which today could be $100.
"There can be any number of reasons you could
need cash quickly. The need for the public is there. You can't go
to a bank and borrow anything less than $5,000; they can't do anything
less than that.
"The pawnbroker services people with $10 loans,
and we do a tremendous amount of $10 loans."
Jay MacDonald is a contributing
editor based in Florida.