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
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.
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.
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 pawnbroking profitable? ›
For a clear signal that the cost of living is still biting for many, you just need to look at how business is booming at the UK's largest pawnbroker, H&T. The company recently reported a 12.5% rise in pre-tax profits to £9.9 million for the first half of 2024.
What is the profit margin for a pawn shop? ›
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.
How do pawnshops earn money? ›
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.
What do pawn shops not buy? ›
Illegal Goods
You simply can't bring in illegal items like drugs, passports, hazardous waste, and stolen goods to a pawn shop and expect to leave with cash.
What are the disadvantages of a pawn shop? ›
What are the disadvantages of a pawnshop loan? Pawnshop loans have high interest rates and fees, which can make them difficult to pay back. Additionally, the amount of the loan is typically lower than the value of the collateral.
Is it better to pawn or sell? ›
Pawning or selling is a personal choice. It boils down to two options: wanting to get items back or not wanting them back. If customers want their items back, then pawning is the best option. But if they want to get rid of their items, selling is the better choice.
Are pawn shops risky? ›
Every store is vulnerable to theft and fraud. Pawn shops have the additional concern of the legitimacy of the merchandise they buy. There are numerous instances of people selling stolen items to a pawn shop. Pawnbrokers can be liable if they know that an item has been stolen from a third party.
Additionally, if the former owner of the property tenders money to get the property back, and the pawnshop fails to produce it, the property can be regarded as lost or stolen and the pawnshop is liable to the owner. Other written documentation of a pawn transaction may include a bill of sale.
What percentage of an item does a pawn shop give you? ›
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. High-end TVs.
Can a pawn shop tell you who pawned an item? ›
If you do locate your property in a pawnshop, pawnshops usually do not release any information due to privacy laws. They also are under no obligation to answer questions. If you do locate your property inside a pawnshop, you should contact the police department immediately for assistance.
What item do Americans pawn the most? ›
Below are the most pawned items that pawn shops love and that are sure to get you an offer.
- Jewellery. Among all the things that Americans prefer to loan or sell, when they need cash, jewellery tops the list. ...
- Sports Equipment. ...
- Electronics. ...
- Musical Instruments. ...
- Power Tools.
You could get a few hundred dollars for a newer laptop, with a good processor, and that is in good condition. Or you might have a pawn shop tell you that they can only give you around $50 if the laptop is in poor condition, old, or not that powerful.
What is the best pawn Star sells? ›
We count down the 10 biggest payouts ever on the history of the show.
- $111k - 200+ Pounds of Silver. ...
- $95k - 1932 Lincoln Roadster. ...
- $90k - 1961 Gibson SG Les Paul Guitar. ...
- $85k - 1941 Gibson SJ-200 Guitar. ...
- $80k - 1922 Proof Peace High Relief Dollar. ...
- $68,250 - 1932 Custom Ford Roadster.
At a pawn shop, you leave your property and, in return, the pawnbroker typically lends you approximately 25% to 60% of the item's resale value. The most commonly pawned items are jewelry, electronic and photography equipment, musical instruments, and firearms.
