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You shouldn't feel afraid or embarrassed about heading to a pawnshop, but there are some things you need to know.
Don't believe the bad things you've heard
Pawnshops aren't the shady, scary places they often appear to be in the media. "Pawnshops have been unjustly vilified by the mainstream media, and so most people perceive pawnshops to be dirty and seedy," says Harrison.
Rather, pawnshops are regulated by 14 federal statutes and regulations, plus numerous state and local laws, says Emmett Murphy, spokesman for the National Pawnbrokers Association, or NPA. "The majority are clean, well-lit stores run by people who pride themselves on providing good customer service."
Murphy advises checking with the local Better Business Bureau or looking on the NPA's website for member stores in your area.
Getting the loan
Here's how a pawnshop transaction works:
- Pawnshops offer collateral-based loans -- meaning the loan is secured by something of value. You take in something you own, and if the pawnbroker is interested, he will offer you a loan. The pawnbroker then keeps your item until you repay the loan. The loan amount will likely be a small fraction of the item's actual value.
- You can sell your item to the pawnshop outright, but pawnbrokers are less enthusiastic about these transactions because loans offer much more profit potential for the pawnbroker.
- You must receive a pawn ticket. Don't lose this! Not only is it the receipt for your item, it also summarizes the terms of your loan: fees, expiration date, description of your item, etc.
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Repaying the loan
You have 2 choices for repayment:
- Return to pay the balance, including the loan amount plus all added fees, before the deadline, which is usually 1 to 4 months after the initial transaction.
- Don't return and the pawnshop keeps your item. Aside from losing your item, there are no other consequences -- no collection action and no effect on your credit report. On average, though, 80% of all customers do reclaim their items, according to the National Pawnbrokers Association.
In some locations, you can extend the loan period by up to several months, but you'll incur additional charges.
The interest rate explained (... sort of)
The dollars and cents of pawnshop loans get a little complicated because: a) rules regarding the fees vary widely from state to state, and b) it's not a cut-and-dried interest rate.
The term "interest rate" can be very confusing, so it's better to think of the total allowable "finance charge," says Steve Krupnik of South Bend, Indiana, creator of the Pawn Shop Advisor coaching program and author of the book "Pawnonomics."
"Pawnshop loans are nearly all state-regulated, and 'finance charges' can vary from 5% per month to 25% per month. In Indiana, the 'interest rate' is capped at 36% APR or 3% per month, but pawnshops can charge an additional 20%-per-month service charge, making the total allowable finance charge 23% per month," says Krupnik.
However, Krupnik says, "The pawn industry is evolving rapidly and these maximum finance charges are voluntarily being reduced by many operators, especially on larger pawn loans that are now becoming the 'new norm.'"
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"These are what we call 'safety net loans' and are usually for life emergencies," Murphy says. The typical fee, he adds, is often lower than the cost of a bounced check or a disconnected utility.
To learn the maximum rates allowed in your area, along with any rules regarding pawnshop transactions, check your state's website; most likely, the information will be in the consumer protection section.
The bottom line: Make sure the pawnbroker clearly explains all the fees involved in your loan before you finalize the transaction. These terms also should be listed on your pawn ticket.
What pawnshops do and don't want
When considering pawning something, keep these tips in mind:
Don't: Offer anything outdated, difficult to store or cheaply made, Krupnik advises.
Do: Go with jewelry or coins, Harrison suggests. Other good choices, according to Krupnik, are firearms, high-quality tools and musical instruments.
Be prepared for red tape
The pawnbroker is legally obligated to confirm that you are the legal owner of the property.
"They will ask you enough questions about your property to become comfortable with the fact that you own it," says Krupnik. "Do not be offended; the pawnbroker is just trying to make sure that both you and the property are legitimate.
Also, if you do business with the pawnbroker, expect to have to show a government-issued ID. It is required by law."