I decided to look at how pawn shops work for my blog post. I ended up listening to an NPR interview with one of the stars from the reality TV show Pawn Stars to get familiar with the concept. What I learned was that Pawn shops offer what is called a collateral based loan. This means that in order to secure a loan, the customer must bring something of value to the pawn broker to offer as security for the loan. If the Pawn broker accepts the item as collateral, then the customer gets his or her loan. Once the customer pays back the loan, including interest, they get the item back. However, if the loan and interest are not paid back in time, the pawn broker gets to keep the item that was used as collateral. The amount of money pawn brokers are willing to give as a loan is usually determined by the value of the item that customers pawn. However pawn brokers often grossly undershoot the value of the item that is pawned and only offer a fraction of the actual value. They do this so they can turn a profit when they resell the items to customers looking for a deal. Another disadvantage to pawning is that the interest rate on the loans are usually steep, somewhere between 10% and 20%.
So, why would anyone go to a pawn shop instead of a bank for a loan? One thing is the lack of accountability if the customer is unable to pay the lone. If the customer fails to pay the loan plus interest in the set amount of time, then the pawn shop keeps the collateral and can put it on sale if they chose to do so. However, this is the extent of the negative repercussions of not making a payment. There are no further credit ramifications, and no further penalties other than losing the collateral. This lack of accountability allows people to quickly liquidize assets such as jewelry, clothing and accessories with minimal risk and little association with the transaction.
Fight Night Gamblers are notorious for using pawn shops to fund their bets. The quick access and low accountability is perfect for a quick loan to fund something as uncertain as a bet on who will win in a fight. The next morning, the winners pay back their collateral including interest with the money that they won on the fight the night before, while the losers jewelry tends to sit until it gets put on display to be sold.
Gamblers aren’t the only ones who use pawn shops for their easy access and quick access to cash. Pimps also use the pawn shops streamlined loan to get quick cash for bail money. Pimps will buy jewelry from pawn shops, knowing that they will get at least half of its value when they sell it back. Then, if the pimp were to be arrested, all of their money would be confiscated because it was obtained illegally, but their jewelry and bling remains the property of the pimp. When the pimp gets arrested, it is an easy process for the pimp to have someone take the jewelry to the pawnshop and to get a quick loan which then becomes the pimps bail money.