Pawnshops make money by providing personal loans, reselling retail items, and offering auxiliary services, such as money transfers or cellphone activation. Earning interest on loans and profits on retail sales are the principal income sources for the standard business model for a pawnshop. Pawnshopsg typically aim to generate overall net profit margins of at least 15% to 25%.
Key Takeaways
- The two primary ways pawnshops make money are by making personal loans and by reselling retail items.
- A pawnshop owner makes a loan to a customer who turns over the custody of an item that acts as collateral for the loan.
- Because the risk of loan default is high, the pawnshop owner will charge the customer a higher interest rate for the loan than a traditional bank loan.
- If the customer fails to repay the loan plus the interest (or at the very least, the interest charge), the customer forfeits the property put up as collateral to the pawnshop.
- Pawnshops can also make money from retail sales, either selling merchandise purchased directly from customers or items pledged as loan collateral from customers who subsequently defaulted on their loans.
Providing Personal Loans
The first revenue source for a pawnshop is income derived from making loans and earning interest on the loan balances. A pawnshop makes a loan to an individual who turns over custody of an item, such as a television or a computer, that serves as collateral for the loan. The amount a pawn shop is willing to lend is based primarily on the value of the item, but it can also be substantially affected by the pawnshop's current inventory at the time of the loan.
For example, if a person is looking to borrow money using a television as collateral and the pawnshop's inventory is already overflowing with similar televisions, it will generally offer to lend considerably less money than if it were low on inventory for televisions.
Terms for a Pawnshop Loan
Pawnshops make loans at substantially higher interest rates than banks typically charge for personal loans. The risk of loan default is much higher, and many individuals seeking loans from a pawnshop cannot qualify for traditional bank loans. Interest rates charged by pawnshops generally vary between 6% and 36%. State law governs the amount of interest that a pawnshop is allowed to charge, and regulations vary widely from state to state.
Loans are generally made on a monthly or 30-day basis. By the end of the month, to avoid forfeiting the property put up as collateral, the individual must either pay back the loan in full plus the interest charge or simply pay the monthly interest charge, which allows the individual to extend the loan for another month. Pawnshops are generally willing to extend loans indefinitely as long as the interest is being paid, as they may eventually collect more in interest charges than the amount of the loan itself, while still holding the loan collateral against default.
As far as how much a person can borrow against an item, pawnshops typically look to lend no more than 25% to 50% of the projected resale value of the item pledged as collateral. The pawnshop owner also has to factor in potential costs of storage, cleaning, repair, and advertising, as well as covering general overhead expenses.
Should you find yourself in need of a small personal loan and are unable to provide any collateral, or if you are hesitant to work with a pawnshop, there are several unsecured options that may fit the bill.
Reselling
The second primary source of income for a pawnshop is retail sales. Merchandise includes items that the pawnshop has purchased outright from individuals and items that were pledged as collateral by loan customers who then subsequently defaulted on their loans, thereby forfeiting the pledged collateral property to the pawnshop.
Pawnshops offer a bit more money to outright purchase items than they offer to lend against the items—perhaps 10% to 15% more—because they know that they will have the items available for immediate resale and can more accurately project their likely profit margins on reselling the items. Items that the shop eventually acquires through loan defaults may offer them higher or lower profits in the end, depending on the items and the length of time the loans were carried prior to default.
If a loan was maintained for a lengthy period of time, the pawnshop may have already made a profit just from collecting the interest payments made prior to default. However, the length of time may also mean that the item has deteriorated in value to the point where it has little or no resale value.
Auxiliary Services
Pawnshops commonly supplement their income by offering auxiliary services for which the shops charge fees. Typical extra services offered by pawnshops include check cashing, cell phone activation, Western Union or other money transfer services, and bill payment services. Some pawnshops also act as shipping locations for UPS or FedEx.
FAQs
The two primary ways pawnshops make money are by making personal loans and by reselling retail items. A pawnshop owner makes a loan to a customer who turns over the custody of an item that acts as collateral for the loan.
How do pawnshops make money? ›
Whether it is the pawned items that were unclaimed, or the items that have been bought, the pawn shop makes money by selling merchandise. Over eighty percent of pawns are claimed and the items are returned. That means they require selling merchandise to make a profit other than the interest from the loans.
What brings in the most money at pawn shops? ›
If you want to get the most amount of cash, focus on jewelry with gold, diamonds, or platinum. And don't think that jewelry must be in perfect condition. Most pawn shops will take broken pieces as they still have value.
What do pawnshops want? ›
Things You Can Pawn for a Loan
Electronics, including laptop computers and gaming consoles, are popular. And, of course, jewelry – gold jewelry, in particular – almost always intrigues a pawnbroker. If what you're trying to sell are antiques, all the better. As they get older, they often become more valuable.
Why do pawnshops lowball? ›
Offering low-ball prices helps sellers get quick cash and the pawn shop large profits. Because the loans and purchase prices offered by pawn shops are usually small, pawnbroker businesses require a low amount of start-up financing from entrepreneurs.
What percentage do most pawn shops pay? ›
Since pawn shops typically offer somewhere between 25% and 60% of an item's resale value, you'll need to pawn an item worth between $835 and $2,000 to get $500. As mentioned above, to make the most, it's best to sell items like: Gold jewelry.
How does a pawn shop work for dummies? ›
Here's how pawn shop loans work: You bring in an item as collateral, and the pawnbroker will determine the value of the item, give you a loan based on its cost, and then hang on to your collateral until you've paid off the loan within the specified timeframe; if you don't, the pawnbroker can sell your item.
How much will a pawn shop give you for a $1000 item? ›
According to the search results, pawn shops generally offer loans ranging from 25% to 60% of an item's resale value [1]. So, if you were to pawn a $1000 item, you might receive a loan amount between $250 and $600.
What sells for $100 at a pawn shop? ›
What Can You Pawn for $100?
- Snowboard.
- Flat-screen TV.
- Tablet.
- Bose speakers.
- Apple watch.
- Refrigerator.
- GoPro.
- Power tools.
The Top 5 Most Commonly Pawned Items
- Electronic Equipment. Many pawn shops accept high quality electronic equipment in return for a lump sum of cash. ...
- Musical Equipment. ...
- Sports Equipment. ...
- Power Tools. ...
- Fine Jewellery.
A pawnshop owner makes a loan to a customer who turns over the custody of an item that acts as collateral for the loan. Because the risk of loan default is high, the pawnshop owner will charge the customer a higher interest rate for the loan than a traditional bank loan.
Is it better to pawn or sell? ›
If you decide to pawn an item, you'll likely receive less cash than what it's worth. Selling, however, typically means you'll receive a higher amount of money. Keep in mind, though, that even if you receive less cash to pawn an item, you'll be given that item back as soon as you repay the loan.
How much can I get for a 50 inch TV at a pawn shop? ›
Pawn shops that buy TVs will also pay more for a bigger screen. If your TV's screen is less than 26 inches, you'd be lucky to get over $50 for it. If your screen is greater than 42 inches, though, a pawnbroker like GEM might offer you over $200, provided the TV is one of the brands mentioned above.
What not to say at a pawn shop? ›
DON'T: Do not point out flaws in an item you want to purchase. This is just rude to the pawnbroker who spends their time assessing the value of the item and has years of experience doing it. Do you think you're better at pricing secondhand items than them? Perhaps not.
How do pawn shops profit? ›
Industry Overview. The 10,600 pawn shops in the US provide secured loans to individuals, using items of personal property as collateral. Firms earn interest and service fees on the loan, with interest rates charged varying by state. Pawn shops also generate revenue by selling used merchandise obtained from unpaid loans ...
How do you negotiate with low ballers? ›
Tips for handling low ball offers
- Always respond gracefully. When you respond defensively, you will only create a barrier than making progress or entering into a negotiation. ...
- Be prepared with counteroffers. You need to be a skilled negotiator who is able to overhear the buyer's innermost thoughts. ...
- Negotiate other terms.
How do pawn shops calculate value? Most pawnshops try to maintain a 38-50 percent profit margin, which means they want to earn that much compared to what they offer you. So, they'll assess your item's market value, then reduce it by their profit margin.
Is owning a pawn shop a good business? ›
As far as starting a pawnshop business, you can generally rely on having repeat customers. And when it comes to loan repayment, the countrywide average hovers around a 75% success rate as far as people paying back the loan and retrieving their items.
Is it better to pawn or sell to a pawn shop? ›
If you decide to pawn an item, you'll likely receive less cash than what it's worth. Selling, however, typically means you'll receive a higher amount of money. Keep in mind, though, that even if you receive less cash to pawn an item, you'll be given that item back as soon as you repay the loan.
What do pawnshops make loans based on? ›
A pawn shop loan uses an asset that you own as collateral, which is exchanged for a cash payment. Typically, a pawnbroker will appraise the asset being used as collateral and pay you a percentage of its value. Nearly any item of value can be used to secure a pawn shop loan, including firearms, jewelry and electronics.
