Have you ever wanted to know how pawn shops work? No problem, I’ve got you covered!
Quick Overview On How Pawn Shops Work
Pawn shops typically make money by making loans on merchandise (jewelry is common). They determine it’s value and then offer to make you a loan on your item, or often times they will offer to buy it outright.
If you decide to make a loan on it, you will have to come back in the agreed upon time (which is often regulated by the State you are in) and pay back the amount you borrowed plus any interest and fee’s that may have been included.
Once you pay back your loan, you will get back your merchandise. It’s that simple.
Let’s Go Each Detail More Completely…
How Do Pawn Shops Make Money?
For most pawn shops, they operate essentially as a buy and sell business. They will buy items from the public and then turn around and sell them.
The principle here is simple – they have to pay less for the item than they will sell it for. So when you are selling your merchandise or gold to a pawn shop, you’ve got to realize that they still need to make money on the transaction.
The Same Goes For A Loan
Just because pawn shop buy and sell merchandise daily doesn’t mean that is the only thing that they do.
There are some things that you would never sell and they understand that. Your mothers wedding ring for instance. Maybe your grand father’s pocket watch?
Typically speaking, if a pawn shop will buy something they will also provide you the option to just make a loan against it so that you can come back and get it later.
Why Do I Get Offered Less For A Loan Than A Buy?
This is important when it comes to anything made out of a precious medal. The price of these metals (such as gold or silver) changes slightly ever minute that the stock exchange is open.
If the price of the metal crashes while they are holding onto your ring, they might not be able to sell it for as much as they gave you for it.
It’s not uncommon for them to give you a little less for the item than if they were to buy it outright. By making a loan on an item, they are actually taking on a little more risk than if they were just buying it immediately because they will have to hold onto it before doing anything with it.
If you come back and get your ring, that’s great – they didn’t lose anything. But if they are holding onto your ring and you don’t come back for it they now paid more for the ring than they can melt it for.
For instance, let’s say that they are looking at your gold ring. They determine that it weighs 4 grams and is made out of 14 karat gold.
They might offer you $65 to buy the ring outright, but if you need a loan they might only offer $35 or $40.
The reason is simple. If you sell them the ring they can turn around and melt the ring or sell it to another customer quickly.
Either Way There Is One Rule
Whether they are buying your item outright or making you a loan against it, they still need to give you a little less than they could sell it for….
And That’s Where Problems Tend To Occur
We anyone sells something, they want to get the most out of that item they can. It’s only common sense. Wouldn’t you want the most you could get for something that you were selling?
Unfortunately the pawn shop is a business and that means they need to turn a profit. If they are in the business of buying and selling mechandise, that means they can’t afford to give you full value for your item.
There’s nothing wrong with it – it’s just ‘the nature of the beast.’
But They Provide A Valuable Service
You see, even though a pawn shop can’t pay you the full value of your item, they are always welcoming buyers.
That means if you hit hard times and need to cover your bills immediately, there is always going to be someone that can help you out with a quick sale and fast cash for your merchandise.
That’s a valuable service to people who need money quickly. If you’ve ever had a time in need or know of someone who has then you immediately recognize the relief that provided that person or family.
How Do Pawn Shops Determine Value
You have to remember that pawn shops are open 5, 6, and even 7 days a week. They are constantly buy and selling merchandise.
For instance, if you have a common item like a 12 Megapixel Canon Rebel digital camera they may have sold another like it recently. They may already know exactly how much they sell for and based on that know that they have to pay you a little less than whatever amount that is.
But They Can’t Know Everything, Right?
Well that is true. If it’s a unique item or often times in larger chain operations the pawnshop employee helping you will need to look the item up somehow to get a value on it.
Large chain operations will occasionally have a ‘monthly catalog’ of merchandise that the pawn shop employee can look at and calculate the value of your item with.
In a smaller operation that may have to rely on other tactics to determine prices of merchandise that comes in. There are some things that they do though…
You obviously have internet access if you are reading this. So you’ve probably heard of eBay.
EBay acts as a live marketplace for various goods being bought and sold regularly. It also makes for an excellent resource for pawn shop owners who need to see what something is selling for right now.
Warning Before You Go Off To Ebay
They aren’t going to look at ‘listed’ prices, or ‘buy-it-now’ prices. Those are just the prices that some guy made up for his item.
A pawn shop will be interested to see what something actually sold for in a live auction.
So if you decide to look up what you item is worth at home, look at ‘sold listings’ or ‘completed listings.’ They keep on changing the name of the option, but it’s always one of those two.
Whatever that dollar amount is that the cheapest listing sold for, expect to be offer at least 25% less than that for your item.
As previously discussed, that’s what a pawn shop does. That’s is how a pawn shop makes money.
How Do Pawn Shops Make Money On Gold & Other Jewelry?
Gold and jewelry are special items in a pawn shop.
You see, if you sell a microwave the pawn shop employee may already know what he can sell it for. But when it comes to gold and other jewelry made from precious medals, the market is always moving and they may not know what they will be able to sell it for.
You State May Have Laws About It
See, different States will often establish the laws pawn shops have to operate and abid by. That often means how long they have to hold buys and loans before they can turn around and sell them.
But with precious metals like gold, the price is constantly moving. In today’s market, the price can move by as much as $80 a day!
How That Affects The Price
Remember the #1 rule of pawn shops. They have to give you less than they can turn around and sell something for.
So since they don’t know if the market is going to take a sudden down turn right after you leave the pawn shop, they have to make you an offer significantly less than the current value of your metal.
If they are buying it, they can offer you more because often times they will be able to sell or melt it much sooner than if they had made a loan against it.
How Pawns Make Money With Loans
If you decide to make a loan on your merchandise often times the pawn shop will be able to charge you interest on that loan.
Often times that is regulated by the State the pawn shop operates in, but for our example lets say the State regulated it to 5% every 30 days.
If you borrowed $100 against your ring, you would owe $105 + any other fee’s to get your ring back within the first 30 days.
In the State of Ohio (at the time of writing) the pawn shop can also charge you $4 to store your merchandise every month. So in the case of the $100 loan above, it would actually cost $105+$4 (a total of $109) to get your ring back.
It’s been a few years since I last wrote this article and I can tell you that not much has changed.
Pawn shops are still in the business of helping people when they need it the most. They are taking in many more electronics these days than they had in the past, but beyond that, it is business as usual.
WordPress junkie, music lover, and consumer of all things pizza-oriented. I’ve run pawn shops and check cashing operations for years. I developed the most successful digital marketing marketing strategy for pawn shops known to date, and flip items on eBay for fun.