- Legal EditorHenry Dahut, J.D.
Henry Dahut, J.D.
Attorney - Legal Publisher - Educator
Henry Dahut is a licensed California trial attorney. Over the course of his 30-plus years practicing law, Henry has represented and counseled countless clients in legal trouble.
Read more → -
Most consumers think that pawn shops are the place to go to sell their valuables when they’re in a tight spot. This is only half the picture. Pawn shops offer short-term, super-high-interest loans that are secured with the property the borrower has pledged as collateral for the loan.
How Pawn Shops Work
Consumers who need fast cash but do not have the credit to qualify for a traditional loan can pledge their personal belongings, such as jewelry, as collateral to obtain a fast cash loan.
If the consumer-borrower defaults on the loan, the pawnshop will keep the property and resell it. If the consumer does not default, the property is returned, but the interest rate the consumer pays will be extremely high.
Pawned Items In Demand
- Gold Jewelry
- Firearms
- Play Station’s
- Musical instruments.
- Current electronics.
When a Borrower Defaults
If a consumer cannot make the agreed repayments, the pawnbroker you’ve borrowed from will keep the item and likely resell it at a substantial markup.
Interest Rates are Extremely High
If you repay the loan as agreed, you pay the interest on the loan and receive your property back. This means whatever your pawn must be worth is at least the amount you hope to borrow. In fact, the value of the pawned property is at least two times the amount of the loan you hope to receive.
The monthly interest rates can range from 5% to 22% a month or more, depending on whether state law has statutorily capped interest rates pawn dealers can charge.
Amount Pawn Shops Lend
The amount pawn shops lend varies substantially. Pawn shop’s loan-to-collateral varies, but the loan will likely be around 20% of the property’s estimated resale value.
Climbing gold values
Due to the current geopolitical crisis between Russia and Ukraine and the recent collapse of FTX and other forms of digital currency, the price of gold has quickly been climbing. With 2022 gold prices topping $1,800 an ounce, it should be no surprise that workers, retirees, and workers from all walks of life are mining for their old gold and jewelry that’s been stashed away in old dresser drawers and safe deposit boxes.
Need For Fast Cash
Forget digital currency. There is a resurgence in old and unwanted jewelry, such as former gold wedding rings and necklaces, that is quickly becoming a popular form of currency for consumers in need of fast cash. But pawnshop transactions come at a very high price for the consumer.
While the Federal Reserve attempts to fight inflation by tightening credit markets, many consumers are locked out of traditional forms of borrowing. In the past 12 months alone, the Fed has hiked rates seven times. As of December 2022, the federal funds rate reached 3.83%, and analysts predict that it could reach 4.9% by late 2023.
Yet despite the fiscal tightening, people still need ways of accessing fast cash in cases of emergency.
Pawnshops Thriving
As traditional consumer credit markets continue to tighten, pawnshops are reporting record sales from borrowers who are pawning their gold and jewelry as collateral for short-term loans or who are selling their gold and jewelry outright for quick cash.
Pawnshop owners across the country are amazed at the phenomenon, which most say reflects a vast and sustained demand for gold worldwide. “When I saw the price of gold over $1,400 an ounce, I saw it as a tremendous opportunity to get rid of jewelry that for me had bad memories,” said a retired lawyer from San Fransisco. According to Monex, in January 2023, gold reached 1,874 an ounce!
As the credit markets continue to decline and conventional lending becomes less available to low-income consumers, people with immediate cash needs will be trading for dollars through local pawn shops and virtual outlets across the country.
Online Pawning
Online pawn and trading services are getting into consumer lending with a vengeance. Consumers send in their gold and jewelry for a quick appraisal, and the deal is made if the trading parties agree on the price.
Shipments of all precious metals are made via a company-supplied certified mailing pouch that is insured and bonded, so both the buyer and the consumer are protected.
The relative value of pawnshop loans
When it comes to pawn shop loans, whether it’s worth it is an extremely relative term. Under normal circumstances, borrowing from a pawnshop should always be considered the loan of last resort. First of all, you only receive about 20% of the estimated resale value of your pledged property.
Even if you repay the loan on time, the annualized interest rate can be ten times or higher than the amount of interest charged by conventional lenders for an unsecured loan, while the pawn shop loan is a secured no, risk loan.
There are alternatives to pawn shops. You will need to do some research and see if you can get a better deal selling your valuables online on platforms like Craigslist, Facebook, and eBay. Or better yet, sell it to a friend or family member and give them three months to pay for it interest-free.
