Everyday, thousands of people from all walks of life are in need of short-term, small-dollar loans. These loans are not available from banks, credit unions and other traditional lenders. With the success of “reality biased television shows such as Pawn Stars”, people are discovering that modern-day pawn stores are clean, well-lit businesses that serve consumers from every social strata. However, many people are still unclear on what pawn stores do and how pawn loans actually work.
“With the economy still lagging, consumers are looking to pawn stores to borrow only what they need,” explains Kevin Prochaska, president of the National Pawnbrokers Association. “Yet there are some key things to keep in mind when taking out a pawn loan.” For consumers seeking safety net loans from a trusted, licensed pawnbroker, NPA answers the following questions about pawn stores:
1. What does a pawn store do? The core of a pawn store’s business is making collateral loans. Pawn stores offer loans, secured by something of value. The pawn store may have other business elements such as retail sales. However, pawnbrokers focus on lending money.
2. How does a pawn loan work? Customers bring in an item of value, and the pawnbroker offers a loan based on a percentage of the item’s estimated value. The pawnbroker then keeps the item until the customer repays the loan with interest and any additional fees that may apply. Pawn stores are regulated on a federal, state and local level.
3. How much money can I get for my item? On average, customers receive only a portion of the item’s retail value. Remember, the pawnbroker is loaning money on the item, not buying it. The pawnbroker must consider the cost of storage, security and future demand for the item, along with the resale value if the loan is not repaid. The average loan amount nationally is $150. However, loans can be made for any amount, depending on the value of the pawned item.
4. What kind of interest rate will I have to pay on the loan? Interest rates vary from state to state and usually amount to less than bank overdraft fees, utility reconnect fees, or credit card late fees. In Kentucky Pawnbrokers are allowed to charge 22% (2% interest, 20% as a storage fee). At Western Kentucky Pawn we waive the interest. For example at Western Kentucky Pawn a $80 pawn loan at 20% for 30 days would cost about $16. Compare that to an overdraft fee or a credit card late fee that may negatively affect your credit.
5. What do I need to do to get a pawn loan? In order to secure a pawn loan, you simply need an item of value and proper state identification. Pawn loans do not require a credit check, bank account or co-signer.
6. What happens if I don’t repay my loan? Defaulting on a loan can never affect consumers’ credit scores. Because the loan is based on collateral—that is, an actual piece of property—the loan is considered paid in full when the item is handed over to the pawnbroker
“For years, pawn stores have been providing safety net loans to families that encounter sudden financial emergencies,” adds Prochaska. “These vital, small-dollar loans simply aren’t offered by banks and other traditional lending institutions.”