Strapped for cash? Pawnshops offer short-term solution
In recession, many learning for first time how these loans work
By LaRita Heet | Published: July 1, 2009
Need quick cash? Credit cards maxed out? Look no further than your jewelry box or attic to uncover buried treasure in the form of jewelry, art and other valuables. Turning those valuables into cash is as easy as a trip to your local pawnshop.
Not ready to part permanently with Grandma's wedding ring? No problem: Pawnshops grant short-term loans using your personal property as collateral, providing you with money in as little as five to 10 minutes, and best of all, no risk or effect on your credit, even if you default on the loan. Once you repay the loan -- usually in one to four months -- and the small loan fee, Grandma's ring is returned to you.
The average pawnshop loan is only $75, and the average pawn customer is 36 years of age, has a household income of $29,000 and comes from all ethnic backgrounds, according to the National Pawnbrokers Association (NPA), a 2,400-member trade association. The NPA estimates that 80 percent of pawn customers are employed, 82 percent have a high school diploma or a GED, and 33 percent are homeowners.
No credit risk involved
For cash-poor borrowers, the lack of credit risk inherent in a pawnshop loan can be a veritable gold mine. "Pawnbroking is the only consumer credit source where if you don't repay the debt, the only recourse is the personal property that you pledged. The pawnbroker will never go after the borrower," says South Bend, Ind., pawnbroker Steve Krupnik, whose 30 years of pawnbroking experience led him to write "Pawnomics: A Tale of Historical, Cultural and Economic Significance of the Pawnbroking Industry."
In the current economy, pawnshop loans can translate into lifesavers for customers whose job losses, mortgage problems or other financial straits mean they can't buy groceries, pay credit card bills or put gas in the tank, says John Appelbaum, whose family has owned Sacramento Loan and Jewelry Inc. since 1966. "We are seeing people that we haven't seen before. We have been buying more jewelry, gold, than we've been before."All that glitters may not be gold, however. Critics claim that pawnbrokers prey on people who have fallen on tough times, and offer a pittance for pawned items.
A borrower's primer
Before you head out to hock your valuables, experts offer the following guidance for pawnshop borrowers:
1. Make sure the shop is legally licensed (by the state, local authorities or both) as a pawnbroker, rather than just operating as a "second-hand" store, says Krupnik.
2. Don't leave the shop without the loan document -- or as it is more commonly known, the "pawn ticket" -- which must include full disclosure of the loan and repayment terms, including fees, loan term, grace period and the final date at which the borrower would be in default.
3. Only borrow what you really feel you can pay back in the shortest amount of time possible. If you know you can't repay the loan, then sell your property outright to the pawnbroker -- you'll earn more money for it, and forgo months, even years -- of loan fees.
4. Expect only 50 percent to 75 percent of the fair market value of the item. That Tiffany ring may have cost you $5,000, but if its fair market value is only $1,000 today, you might be able to borrow only $500 against it.
5. Don't expect big bucks for tech toys or computers, which become obsolete quickly. Some items can drop in fair market value by nearly 50 percent within months.
Some customers agree. "I took two diamond rings into a pawnshop, and they offered less than 10 percent of their retail price. My husband wasn't working and we needed the money, but the offer was ridiculous," says stay-at-home mom Cindi A. (last name withheld for privacy reasons), of St. Louis. "Instead, I sold them on Craigslist the next day at a fair price. People should check out eBay, Half.com or Craigslist before they sell their things to a pawnshop for next to nothing."Pawnbroking: How it works
Before granting a loan, the pawnbroker will assess the property's value and then discuss the options (borrowing against the personal property compared to selling the property outright) and loan terms with the customer. Loans are generally granted at a percentage -- generally about 50 percent -- of the fair market value of an item (as opposed to its original retail price). Selling the item outright means a higher payout, but often the customer wishes to keep the pawned article.
According to the NPA, contract periods vary by state, but are typically 30 days with an additional 30-day grace period. Individual states also set loan fees and allowable interest rates on pawn loans. Customers may choose to borrow less than pawnbrokers are willing to loan on items, as well as when (during the loan term) they choose to pay the loans.
'Lending fees' renew loan
If you can't afford to pay the loan when the due date arrives, no problem, says Krupnik. Most, if not all, pawnshops allow customers to renew loans by simply paying the lending fee from the first loan. For example, if you borrow $100, with a $10 loan fee per month on a three-month loan term, you can renew the loan after three months by simply paying the accrued loan fees (in this case, $30), and then the loan would begin again. Other customers may choose to pay those fees, plus a portion of the loan principal (especially on larger loans), or pay a portion each month, treating it as an installment loan.
Unless otherwise established under state laws, there is no limit on the number of times a person can renew his loan. In fact, says Krupnik, "They can renew it forever, if they choose. However, we discourage that."
"I've literally had people have things in here for 30 years, which is unbelievable," says Appelbaum.Pawnshops clean up
Though the seedy pawnshops of made-for-TV movies still exist, many of today's pawnshops are bright, clean and appealing, according to pawnbrokers and customers alike.
When Bellevue, Wash., public relations representative, Terri K. (last name withheld for privacy reasons), 33, ran short on cash last October, she visited the Elegante Jewelry pawnshop for the first time. Terri, who pawned $4,000 diamond earrings for a short-term loan, was pleasantly surprised at the ease of the transaction, and the friendliness of the pawnbroker. "They're really high-class, so it wasn't embarrassing, it wasn't weird, and they're really nice," she says.
Appelbaum's typical borrower is a state worker between 35 and 60 years old, who makes more than $50,000 a year, and who's run short on money due to mortgage problems. "I've had a lot of customers who have lost their homes due to foreclosure. I have a lot of people coming in that need extra money to make their mortgage payments," says Sacramento Loan and Jewelry's Appelbaum. "That's the average loan customer -- basically a middle-class individual who now is caught in a financial crunch due to layoffs, due to cutbacks, due to mortgage problems."
Pawnshop customer Terri is comforted by knowing that if finances begin to dwindle again, she has somewhere to turn for immediate cash. "I would do it again, because it was like just being out running errands in a strip mall, shopping," says Terri.
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