Okay, so here’s an interesting question that a lot of people may ask themselves and many really don’t know the answer to.
How is it that pawn shops make most of their money?
Well, the truth of the matter is that there is no easy answer to this question unfortunately.
The reason is that all pawn shops operate a little differently.
In stores like Walmart, it’s pretty easy to figure out how they make their money across all of their locations. However, when it comes to pawn shops, all shops are going to operate a little differently.
Some pawn shops are going to be really focused on retail sales while others aren’t going to place much focus on retail sales and instead focus primarily on their loan balance and collecting interest.
Because of these discrepancies in operations, it’s hard to give you one general answer that covers the entire industry effectively.
So with that having been said, what I will do instead is give you a variety of different ways that pawn shops make most of their money so that you understand how they operate and why they may do what they do.
Pawn shops make most of their money through 3 main sources. That is the collection of interest payment, retail sales and online sales. They may also offer additional services that will add to their bottom line.
Interest Payments
The first way that pawn shops make money is through the collection of interest payments on the pawn loans that they make to their customers.
When a customer brings an item in to get a loan, the pawn shop will determine a value for that item (or a dollar amount they are comfortable loaning against it.) They will then collect a certain percentage of that value in interest on a monthly basis.
For instance, in Ohio the interest rate that pawn shops charge is 5% + $4 in storage a month. So if a customer makes a loan on an item for $100, the pawn shop will collect $9 a month to keep that loan active.
Now, just because the payment is due every month doesn’t mean that they get to collect it every month like clockwork. The customer actually has a 90 day window to make those payments.
That means that once a customer makes a loan, the pawn shop may not be able to collect the accrued interest for 3 months and then on that 90th day, the customer can come in and pay all three months of back-due interest and storage payments.
Retail Sales
The second major way that pawn shops make most of their money is through retail sales of items that come into their stores.
How they get those items is either that the customer has chosen to sell them outright to the pawn shop or the item was in a pawn loan that was left unpaid on and forfeit.
The pawn shop will then turn around and sell those items, usually in their retail store. They will collect a modest markup on the items (usually nothing too much) and that markup will represent their profit – or money that they collect above and beyond the costs of the item and costs associated with selling the item (such as cleaning or repair.)
Online Sales
The third way that a lot of pawn shops make their money is by selling items that they have either bought or that have forfeit on websites like eBay or Amazon.
These online sales will typically represent about 25-0% of their total sales and will generally yield a greater profit margin than selling items in their retail stores.
Of course, there are other costs associated with selling items online, such as paying staff to list the items, picture them, answer any questions that come up and then later package and ship them – which is also it’s own cost.
Other Services
Pawn shops typically offer other services outside of just pawn loans and retail sales.
For instance, many pawn shops also do cell phone activation, check cashing, Western Union, and bill payment. These services also act as a means by which pawn shops can make a good amount of money.
Of course, the availability of these services will vary pawnshop-to-pawnshop so it’s hard to say how much money they account for on an industry wide level.
