Have you ever wondered how  pawnshops make money? Since pawnshops function as both a regular retail shop and as a money lender, it can be a bit confusing. Let’s make it simple. Earning interest on personal loans and profits on retail sales are the two main sources of income for a standard pawnshop. They can also make money by providing extra services, such as money transfers or layaway, depending on their specific business model and/or local market.

Key Takeaways

  • The top two ways pawn shops make money is by making personal loans and by reselling retail items.
  • A pawnshop owner makes a loan to a customer, who pledges a personal item as collateral. The customer gives the item to the pawnshop to hold during the term of the loan.
  • If the customer does not repay the loan or keeps up with the monthly interest charges, the customer forfeits ownership of the item they put up as collateral to the pawnshop.
  • Pawn shops usually charge higher interest rates on personal loans because they assume more risk from customers potentially defaulting on loans.
  • Pawn shops generally earn about 65% of their income from personal loans, interest and fees, while they earn about 35% of their income from selling retail merchandise.

Making Personal Loans

Standard pawn shops typically make most of their income from personal loans, including interest and fees. How does this work? Let’s look at an example:

  • The customer brings a gold watch to the pawn shop as collateral.
  • The pawnbroker carefully examines the watch to assess its value at $200 and offers a cash loan of $100 on the spot.
  • The customer agrees to the offer and has 30 days to pay back the loan, plus any interest.
  • If the customer doesn’t pay back the loan in time, the pawnshop keeps the watch and sells it to make its money back, plus any profit.

Personal loans can vary greatly from pawn shop to pawn shop, even in the same area. Why? A lot depends on the shop’s current inventory and customer demand. While loans are based primarily on the item’s value, the pawnbroker also must consider how many similar items they currently have in the shop’s inventory and how quickly the item might sell if the customer defaults on the loan. So, for example, if you bring in a TV as collateral, and the shop is already full of other TVs for sale, you probably won’t get a high loan offer. However, if you bring in a unique high-value item, like a designer handbag or a piece of antique jewelry, chances are the shop will offer you a higher loan amount.

Also, in areas where there are multiple pawn shops nearby, you may be able to shop around and see if you can get a more competitive offer elsewhere. Most pawn shops compete directly with each other for business and will offer higher loan amounts and competitive prices to attract more customers to their shop.

Pawnshop loan terms, interest rates and fees

Monthly interest rates charged by pawnshops generally vary from as low as 2 to 3% all the way up to 25%. State laws determine what pawn shops can charge for interest on personal loans, and state regulations can vary greatly from state to state.

Pawn shops generally make loans on a 30-day basis, but they can also be extended, based on personal circumstances. To avoid forfeiting the property put up as collateral, the customer must either pay back the loan in full plus the interest charge by the end of the 30-day period or simply pay the monthly interest charge, which extends the loan for another month. If the customer pays the minimum monthly interest on time each month, most shops are willing to extend the loan indefinitely. However, this means they may hold onto your stuff indefinitely, too, so just remember that by extending the loan, you are essentially paying the pawn shop to store the item you put up for collateral.

Be aware that most pawn shops make loan offers around 25% to 50% of the expected resale value of the item you’re pledging as collateral, so don’t expect your loan to be worth the full value of your item. Why? In addition to your loan, the pawnbroker must consider the potential costs to store, clean and repair your item, especially if you default on your loan, as well as what it would take to advertise it for resale and any general overhead expenses.

Selling retail merchandise

Pawn shops make about a third of their total income from retail sales. This includes any merchandise the broker bought directly from customers, as well as any items that were pledged as collateral by customers who then defaulted on their loans.

So, when you take an item to a pawn shop, you’ll always have the option to sell or pawn. You can always ask the pawnbroker how much more you would get for selling your item outright rather than pawning it. Most shops offer about 10% to 15% more to buy items than they would offer to pawn, mostly because it’s a much easier transaction for them, resulting in a good quality item that can be immediately resold, often for a decent profit.

Providing extra services

In some locations, pawn shops may offer additional services for a small fee, including check cashing and bill payment services to money transfers and shipping locations for major delivery carriers. Providing these services not only helps the local community, but it also helps the shop owner bring in additional customers and potential income.

Gene’s is here to help!

At Gene’s Jewelry & Pawn, we specialize in treating customers like family and offering you the best prices for your items. For over 30 years, we have provided our customers with the high level of service they deserve. Visit one of our locations in North Charleston, Moncks Corner or Goose Creek, SC, today and see how we can help you, or visit us  online to get a free estimate for your items or shop our outstanding selection from the convenience of your couch!