Pawn shops have a reputation for primarily catering to the poor. A place to go to where you no longer have any other alternatives and need to start selling off your possessions to make ends meet.
On one hand, this is unfair to pawn shops because they serve an important role in providing financial services for those who may not qualify for loans. Historically, they also provided the only avenue for your grandparents to convert their gold jewelery into cash when needed.
Alternatively, there is no denying that pawn shops end up catering to the less fortunate. After all, news sites reported long queues outside pawn shops after restrictions of the first movement control order in 2020 were relaxed.
What does pawn mean?
The online Merriam-Webster dictionary defines the noun pawn as “something delivered to or deposited with another as security for a loan”. In simpler terms, to pawn something is to deposit something as collateral for a cash loan.
Going to a pawn shop is essentially similar to going to a bank to get a small loan – where the bank gets to keep your collateral until you pay them back. The amount you can receive is determined by the market value of your collateral, and that the pawn shop isn’t going to take your credit history or income levels into consideration.
This generally allows tiny micro-loans for those who may not qualify for a normal bank loan.
How does a pawn shop work?
Pawn shops are governed by the Pawnbrokers Act 1972, which means that they are regulated by law and must be licensed to operate. This also means that you may run into unlicensed pawn shops that are operating illegally.
When you visit a licensed pawnbroker with your item (called a pawn), you will first have the value of your pawn assessed. In the case of gold, this is pretty easy as the pawnbroker can quickly refer to the daily gold price to determine its value.
Gold jewelry is not 100% pure gold. It is often a gold alloy to allow it to maintain its shape, which means that you will receive a lot less than the daily gold price for it.
In the case of other items, the pawnbroker will appraise the item according to the current market value and take into account the condition of the item. For instance, there’s not much value in pawning an old laptop because it may not be worth much on the second hand market.
You should also note that note pawn shops may have limits on the types of items that they accept. While gold, jewelry, and watches are the most common, you will have to find out for yourself what the pawnbroker is willing to allow you to pawn.
Can you get your stuff back?
Yes, the pawnbroker will keep your pawned item in a safe storage space and give you a pawn ticket. This proves that you are the owner of the pawn, and gives you a fixed amount of time to return and buy it back with interest. By law, the minimum amount of time you are given to redeem your item is six months; however you are allowed to negotiate for a longer amount of time.
If you manage to come up with the money within that time period, then you can easily just head back over to the same pawn shop and buy your stuff back (with interest).
However, if you cannot afford to buy it back but do have some money left over, you can also opt to extend the pawn (for at most three months at a time). This is done by going back to the pawn shop and paying off the interest. If you don’t come back for your item, then the pawn shop will put it up for sale and allow other customers to buy it.
Pawn shops are not allowed legally to charge more than 2% per month in interest. If you are quoted a higher amount you may be dealing with an unlicensed pawnbroker.
Step-by-step guide to a pawnshop
- Take your possessions to the pawn shop.
- The Pawnbroker will assess their value.
- If you agree, the pawnbroker will issue a pawn ticket, take your pawn, and give you the cash loan.
- Keep the pawn ticket in a secure place. You will need it if you intend to redeem your pawn.
- From here you can:
- Come back within six months and pay off the loan to redeem your pawn.
- Come back within six months to extend the pawn by paying the interest off.
- Don’t come back and your pawn will be sold by the pawnbroker.
Should you use a pawnbroker?
There is no reason to avoid pawn shops if you really need it. It’s the quickest way to convert your emergency gold into cash when you need it – especially if it comes in the form of jewelry.
However, they are generally viewed as a last resort once you have exhausted your other options. For instance, it is better to have medical insurance to cover sudden serious illnesses rather than having to figure out how many possessions you need to pawn to cover payments.
The same goes for other types of insurance and having emergency savings.
Gold may be a popular form of emergency savings, especially among the working class. However, the traditional form of using gold jewelry does not guarantee that you will be able to pawn it for a high value.
If you’re concerned about putting your savings into gold, it would be better to use a gold savings account instead. This offers you the opportunity to own a purer form of gold that can be traded at a better value; plus these types of savings accounts also offer better storage options than putting your gold into a locked box under your bed.
On the other hand, many low income people keep their jewelry in a long term pawn. Redeeming them during special occasions to be worn, and the pawning it off again the next day to ensure that they have enough money to make ends meet.
In conclusion, pawn shops are an important part of the financial services ecosystem; even if they are not viewed to be part of the same industry as banks and credit unions. They offer funding to lower income groups that may be overlooked by bigger institutions and help them get through rough patches.