The pawn industry is one of those business that a lot of people don’t understand at first. If you are one of these people, it’s okay.
The fact of that matter is that unless you have worked in this business for awhile, you may not understand just how it is that a pawn shop makes a profit.
For the most part, all that people really know about pawn shops is that they buy things.
The truth of the matter is that pawn shops do a lot of other things other than just buying merchandise from customers that come in.
Pawn shops also make loans against items so that people can come back at a later point in time and get them back.
Pawn shops also sell items out of their stores that they have either bought or that have forfeit because someone didn’t pay on their loan for an extended period of time.
Then, there are pawn shops out there that offer a variety of other services such as check cashing, Western Union, bill payment services, money orders, cell phone activation, etc. All of these services are things that pawn shops profit off of as well of course.
But let’s stick to the major things that pawn shops really profit from on a regular basis.
There’s a variety of services that pawn shops offer their customers. All of these services will add up and are how pawn shops make a profit through their day-to-day transactions. Whether it’s collecting interest or selling items, pawn shops are typically very profitable.
Pawn Loans And The Interest They Collect
The first thing that pawn shops really stand to profit from are the pawn loans that they make and the interest fee’s that those loans generate.
The amount of interest a pawn shop can collect on a loan is going to vary state-to-state as these are set and regulated by state law.
In some cases, interest rates will also be partially regulated on a city or county level as well as a state level but for the most part – it’s done on a state basis.
These rates can vary anywhere from 1% up to 25% depending on the state that you live in. In addition, some states allow pawn shops to collect storage charges for storing the items that are in on loan. These charges are typically only a few dollars a month, but it can add up over 3 or 4 months time.
The next major way that pawn shop make their profit is by selling items that they have either previously purchased from customer that have come in and sold things or on items that were in on a pawn loan that went unpaid on and forfeit.
When a pawn shop buys an item, they will typically look it up on a site like eBay.com or Amazon.com and see what a similar item is selling for used. They will compare the items condition and completeness to the items that are being brought into the pawn shop and then typically offer the customer roughly 40-60% of the current used resale value.
If a pawn shop is just making a loan against an item instead of buying it, they will typically offer something closer to the 40-50% mark. The reason for this is because if the item forfeits and the pawn shop has to turn around and resell it, the accrued interest and storage charges will be calculated as part of the cost of the item.
Whatever the final cost of the item ends up turning out to be, the pawn shop will then mark those item(s) up to fill in the gap between the current used resale value of the merchandise and what they purchase it for or loan against it. That gap will then be their profit margin after all additional expenses have been taken out of the item (such as packaging, repair, cleaning, etc.)
Profits From Other Services That Pawn Shops Offer
The next major area that pawn shops profit from are all of the other services that they offer.
These can and will vary on a shop-to-shop basis depending on what the owner (or pawn broker) has decided would be a good fit for his or her business and their customer base.
Check Cashing – Check cashing is a service that a lot of pawn shops offer and can add to the profitability of their business. They will cash things like payroll or government checks and keep between 1-3% of the checks total balance for providing that service. In other words, if a check is $100, the pawn shop may keep between $1-$3 for cashing that check,
Western Union – Pawn shops will sometimes offer Western Union money wires as an additional service. When you send a Western Union payment, there is a fee for doing that, part of which the pawn shop will keep and is built into their total profitability.
Cell Phone Activation – Some pawn shops will offer new cell phones to their customers or allow them to pay their bills in their stores. In doing this the pawn shop will get a fee from the cell phone provider for priving that service.
Bill Payments – Some pawn shops offer the service of allowing their customers to pay their bills in their stores. This typically means things like your electric bill, cable bill, water bill, etc. Typically speaking, a pawn shop will charge between $1-$3 for this service.
The Nerd’s Opinion
Pawn shops offer a lot of different services and features, all of which add to the profitability of the business in the larger sense. But the bottom line is that pawn shops really profit the most when they value their customers and treat them like family.
I’ve seen a lot of pawn shops with great business plans and awesome advertising but if they don’t treat their customers like their best friends then they almost always run into problems.
In this industry, pawn shops most profitable asset is their attitude and how they interact with their customers. If their staff isn’t well-aligned with the needs of the customer and helping them through whatever they are going through right at that moment.
In addition, the staff at a pawn shop should be flexible and be able to work with customer not just looking to get a loan on something or sell something but also when a customer wants to buy something. Sometimes taking a little cut on the profit margin and working out a great deal can turn a new customer into a great long-term customer.
