Modern pawnbroker storefront. A pawnbroker can also be a charity. The
Monte de Piedad movement began in Perugia, Italy in 1450 with the Orden
de Menores Observantes de San Francisco. It had the aim of providing
financial assistance to people in the form of no-interest loans, secured
with pawned items. Instead of interest, borrowers were urged to make
donations to the Church. It spread first through Italy then in other
parts of Europe. The first Monte de Piedad organization in Spain was
founded in Madrid, and from there the idea was transferred to New Spain
by Pedro Romero de Terreros, the Count of Santa Maria de Regla[2] and
Knight of Calatrava. The Nacional Monte de Piedad is a charitable
institution and pawn shop whose main office is located just off the
Zocalo, or main plaza of Mexico City. It was established between 1774
and 1777 by Pedro Romero de Terreros as part of a movement to provide
interest-free or low-interest loans to the poor. It was recognized as a
national charity in 1927 by the Mexican government. Today it is a
fast-growing institution with over 152 branches all over Mexico and with
plans to open a branch in every Mexican city.
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In the United Kingdom, typical high street pawn interest rates vary
between 5% (79.59% AER to 12% (289.6% AER) gross per month and the
average annual equivalent rate is 85%.The pawnbroker in the United
States is generally subject to considerable legal restriction. Each
state has its own regulations regarding pawnbrokers, generally
regulating the amount of interest that is allowed to be charged on a
collateral loan. In Massachusetts, a 2007 Boston Globe investigation
suggested 10% monthly interest was not uncommon. In the state of New
York, interest at pawnshops is limited to 4% per month. Towards the end
of 2008 saw the advent of the Online Pawnbroker and the rise in these
Pawn Brokers offering their services for luxury goods to City workers
who had been affected by the economic downturn
A pawnbroker (or pawnshop) is an individual or business that offers
secured loans to people, with items of personal property used as
collateral. The word pawn is derived from the Latin pignus, for pledge,
and the items having been pawned to the broker are themselves called
pledges or pawns, or simply the collateral.
If an item is pawned for a loan, within a certain contractual period of
time the pawner may purchase it back for the amount of the loan plus
some agreed-upon amount for interest. The amount of time, and rate of
interest, is governed by law or by the pawnbroker's policies. If the
loan is not paid (or extended, if applicable) within the time period,
the pawned item will be offered for sale by the pawnbroker/secondhand
dealer. Unlike other lenders, though, the pawnbroker does not report the
defaulted loan on the customer's credit report, since the pawnbroker has
physical possession of the item and may recoup the loan value through
outright sale of the item. The pawnbroker/secondhand dealer also sells
items that have been sold outright by customers to the Pawnbroker or
secondhand dealer.
Assessment of items
The pawning process begins when a customer brings an item into a
pawnshop or pawn shop. Common items pawned (or, in some instances, sold
outright) by customers include jewelry, electronics such as televisions,
car stereos, speakers, computers and video games, DVD movies, music CDs,
musical instruments (often popular music instruments such as electric
guitars and basses and keyboards), and tools (both hand tools and power
tools). In the US, pawnshops with firearms licenses sell pistols and
rifles to customers who meet state and federal acquisition criteria. In
other countries, though, such as Canada and the UK, pawnshops do not
sell firearms. Gold, silver, and platinum are popular items which are
often purchased; even if the source (such as a piece of broken jewelry)
has little value, the metals can still be sold in bulk to a bullion
dealer or smelter for the value of the gold, silver, or platinum
content. Similarly, with jewelry that contains genuine gems, even if the
jewelry is broken or missing pieces, the jewels may have value in their
own right because they can be reset into a new item of jewelry.
The pawnbroker assumes the risk that an item purchased was actually
stolen property. However, laws exist in many jurisdictions that protect
both the community at large and the brokers from unknowingly engaging in
criminal activity (buying and selling stolen goods). These laws often
require the pawnbroker to establish positive identification of the
seller through photo identification (such as a driver's license or
government-issued identity document), as well as a holding period placed
on an item purchased by a pawnbroker (to allow for local law enforcement
authorities to track down stolen items). In some cities, pawnshops must
give a list of all newly-pawned items and their serial number to the
police, to allow the police to determine if any of the items have been
reported as stolen. Many police departments will advise burglary or
robbery victims to visit local pawnshops to see if they can locate
stolen items which might have been pawned or sold to the pawnbroker. If
such items are located they, in most cases, are returned to victim with
or without compensation to pawnbroker depending on local laws. The
person who sold or pawned such items is investigated by local law
enforcement. Some pawnshops set up their own screening criteria to avoid
buying stolen property. In some areas where there is a great deal of
bike theft, for example, pawnshop owners may decide not to accept used
bikes, because the likelihood of them being stolen is too high.
The pawnbroker assesses an item for its condition and sale ability by
testing the item (in the case of electronics or instruments) and
examining it for flaws, scratches, or other damage. Another aspect that
affects salability is the supply and demand for the item in the
community or region. In some areas, the used goods market is so flooded
with used stereos and car stereos, for example, that pawnshops will only
accept the higher-quality brand names. Alternatively, a customer may
offer to pawn an item which will be difficult to sell, such as a
surfboard in an inland state or a pair of snowshoes may be offered to a
pawnshop in a southern state. The pawnshop owner will either turn down
hard-to-sell items or offer a very low amount of money for these items.
While some items will never get outdated, such as hammers and hand saws,
electronics and computer items can quickly get out of date and become
unsalable. As such, pawnshop owners have to learn about the different
makes and models of computers, software, and other electronic equipment,
so that they can discern between items which are still salable, and
those which are obsolete (e.g., a 386 computer).
To assess the value of different items, pawnbrokers use guidebooks
("Blue Books"), catalogs, Internet search engines, and their own
experience to subjectively evaluate the goods. Some pawnbrokers have
training in the identification of gems, or they employ a specialist with
gem training to assess jewelry. One of the risks when accepting
secondhand goods is that the item may be counterfeited or stolen. If the
item is counterfeited, such as a fake Rolex watch, it may have only a
fraction of the value of the genuine item. If the item is stolen
property, the police can recover it to return it to the rightful owner.
Once the pawnbroker has determined that the item is genuine, not likely
to be stolen, and that it is saleable, the pawnbroker offers the
customer an amount for it. The customer can either sell the item
outright if (as in most cases) the pawnbroker is also a licensed
secondhand dealer, or offer the item as collateral on a loan.
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Determining amount of loan
To determine the amount of the loan, the pawnshop owner needs to take
into account several factors. One factor is the predicted resale value
of the item. This is often thought of in terms of a range, with the low
point being the wholesale value of the used good, in the case that the
pawnshop is unable to sell it, and they decide to sell it to a wholesale
merchant of used goods. The higher point in the range is the retail sale
price in the pawnshop. For example, a five-year old 42" Sony TV may have
been bought by the customer for $1000. However, as a used item in a
pawnshop, it will only fetch $250 and $300, because the customers will
be wary that it might be a "lemon" that the seller is getting rid of
because it has some hard-to-detect problem. Used electronics wholesalers
will buy the TV for $100 to $150. The wholesaler pays a lower price than
the retail value because they have the added cost of hiring electronics
technicians who overhaul and repair the items so that they can be sold
in used electronics stores.
The pawnshop owner takes into account their knowledge of supply and
demand for the item in question to determine if they think that they
will end up selling the TV for $100 to a wholesaler or $300 to a
pawnshop customer. If the pawnshop owner believes that there are "too
many used TVs around these days in town", they may fear that they will
only get $100 for the TV if they have to unload it to a wholesaler. With
that figure in mind as the expected revenue, the pawnshop owner has to
factor in the overhead costs of the store (rent, heat, electricity,
phone connection, yellow pages ad, website costs, staff costs,
insurance, alarm system, etc), and a profit for the business. As such,
the customer who comes in with this TV that they paid $1000 for when it
was new may be offered as little as $50 by the pawnshop owner, who is
taking into account all of the risk and cost factors.
In determining the amount of the loan, the pawnshop owner also assesses
the likelihood that the customer will pay the interest for several weeks
or months and then return to repay the loan and reclaim the item. Since
the key to the pawnshop business model is making interest off of the
loaned money, pawnshop owners want to accept items that the customer is
likely to want to recover, after having paid interest for a period on
the loan. If, in an extreme case, a pawnshop only accepted items that
customers had no interest in ever reclaiming, it would not make any
money from interest, and the store would in effect become a second hand
dealer.
Determining if the customer is likely to return to reclaim an item is a
subjective decision, of course, and wily customers may attempt to
persuade the pawnshop owner that the item in question is important to
them ("that watch belonged to my grandfather, so I will certainly return
for it"), and they will claim that they will return to recover it. The
pawnshop owner can use a variety of factors to evaluate the likelihood
that the customer will return, such as whether the customer lives in the
neighborhood or whether the customer has a good track record of
returning to the pawnshop to recover items. Some customers may return
several times over a year and pawn the same valuable item as a way of
borrowing money, and they return each month to pay the interest and
recover the item.
As well, the pawnshop owner can assess the item and the pawner; if a
non-disabled twenty year-old male comes into the pawnshop to pawn an
electric wheelchair (perhaps the possession of his late grandfather),
the pawnshop owner may doubt the man's claims that he will return for
the wheelchair. On the other hand, if a middle aged man pawns a top
quality set of golf clubs, the pawnshop owner may assess it as more
credible that he will return for the items. The sale ability of the item
and the amount that the customer wants for it are also factored into the
pawnbroker's assessment; if a customer offers a very salable item at a
low price, the pawnbroker may accept it even if it is unlikely that the
customer will return, because the pawnshop can turn around a quick
profit on the item. Of course, if a customer offers a top quality,
brand-name valuable at too low a price, such asking for $50 for a $900
Tag Hauer watch, the pawnbroker may turn down the offer, because this
suggests that the item may either be counterfeit or stolen.
Inventory management
Pawnshops have to be careful to manage how many new items they accept as
pawns. If the amount of items in a pawnshop's inventory is examined
along a continuum, one can argue that both extremes are undesirable. One
end of the continuum is a pawnshop with very few items in the shop.
Perhaps the pawnshop mostly buys jewels and gold which are then reset
and smelted, or perhaps the pawnshop owner quickly sells most of the
items using specialty shops (e.g., musical instruments are sold to used
music stores and stereos are sold to used hi-fi audio stores). In this
case, the pawnshop will not be very interesting to customers, because it
will be a mostly-empty store with bare shelves and counters. Customers
walking by a near-empty store will be less likely to be intrigued by the
merchandise and come into the store.
On the other extreme, if a pawnshop has a huge amount of inventory,
there can be several disadvantages. If the store is crammed with used
athletic gear, old stereos, and old tools, the store owner has to spend
more time and money shelving and sorting the items, displaying them on
different stands or in glass cases, and monitoring customers to prevent
shoplifting. If there are too many low-value, poor quality items, such
as old toasters, scratched-up 20 year-old TVs, and worn-out sports gear
piled into cardboard boxes, the store may begin looking more like a
low-end rummage sale or flea market. Small, high-value items such as
iPod players or cell phones need to be put in locked glass display
cases, which means that the owner may need additional staff to unlock
the cabinets and get out items that customers want to examine. As a
store becomes more and more filled with items, an owner has to take more
steps to protect inventory from theft by hiring staff to supervise the
different parts of the store and/or by installing security cameras or
alarms. The biggest problem with accumulating too much unsold inventory,
though, is that this means that the store has not been able to pull out
the value of these items by reselling them, which provides the store
with cash that can be loaned out to borrowers.
As such, the better option lies in the middle of the continuum. A store
that has a moderate amount of good quality, brand-name items arranged
neatly in the display windows attracts passersby, who are more likely to
come in to peruse the items for sale. If the items are attractively laid
out in display cases and shelves in an uncluttered fashion, the pawnshop
has a more professional, reputable appearance. Once passersby start
coming to the store to look at items, they may decide to bring unwanted
items to the pawnshop for loans on subsequent visits. Some pawnshop
owners prevent their store from developing a cluttered look by keeping
some of the less attractive items such as snow tires, or items which are
overstocked (e.g., if there are too many stereos) in a storage facility
in the basement. Another approach used by some pawnshop companies is to
operate a number of stores in a state or province. This way, the
inventory can be moved between affiliated stores so that each store has
a balanced inventory. For example, if a rural location of a pawnshop
accumulates too much hunting and fishing gear, some of the overstock can
be transferred to a suburban location.
Some stores also slim down their inventory by selling some items to
specialty used gear retailers. For example, if a pawnshop in a
low-income neighborhood pays a customer $300 for a power amplifier that
has a used retail value of about $2000, this stereo device may be hard
to sell in the pawnshop, given that most of the stereos sell for a
fraction of this price. However, a high-end used audio store in a
well-to-do neighborhood might be able to sell it for $2000, so the
pawnshop owner may decide to sell the amplifier to the audio shop for
$1000, thus netting $700. Some pawnshops may sell specialty items on
eBay or other websites. A specialty item such as a high-end model
railroad set with a retail value of $1000 may not sell in the store, or
it would only sell for a deep discount. However, if it is put up for
sale on eBay or a similar website, a model train enthusiast 1000 miles
away may decide to purchase the item and have it shipped to them.
Ancillary operations
While the main business activities of a pawnshop are lending money for
interest based on valuable items that customers bring in, some pawnshops
also undertake other business activities, such as selling brand-new
retail items that are in demand in the neighborhood of the store.
Depending on where a pawnshop is located, these other retail items may
range from drug paraphernalia (rolling papers, glass pipes, wire mesh
pipe screens, etc) to hip hop clothing ("urban wear") or biker-style
clothing, such as Harley-Davidson branded t-shirts or other motorcycle
accessories such as "do rags". Some pawnbrokers also sell brand-new
weapons of various types, including throwing stars, switchblades,
butterfly knives, knuckle dusters, etc., despite the questionable
legality of some of these items. Many pawnshops will also buy or trade
used items, as long as the transaction is to the benefit of the
pawnshop. In cases where the pawnshop buys items outright, the money is
not a loan; it is a straight payment for the item. Some pawnshops may
keep a few unusual, high value items in the display window to capture
the interests of passersby, such as a vintage Harley Davidson
motorcycle; the owner is not typically expecting to sell these items.
Other activities carried out by pawnshops are financial services
including fee-based check cashing, payday loans, vehicle title or house
title loans, and currency exchange services.
