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Pawnbroking can be regarded as an informal system of the loan, where one can easily approach a lender and get a loan by putting a valuable item as security. It’s an easy way to get some quick cash, as there are no formal procedures or complicated paperwork that makes the entire process of getting a loan quite difficult.
What Is Pawnbroking?
Pawnbroking refers to as the process of acquiring a loan on the basis of a collateral (security). There is no limitation on what can be kept as a collateral for the loan, and thus, you can take anything from your home as the security to the pawn shop.
It completely depends on the pawnbroker that whether he/she is interested in the item that you are offering, and if they show an interest, you will be offered the loan. The pawnbroker will keep your items until the time you repay the loan.
The amount of loan will also depend on the monetary value of the good which you are keeping as security for the loan. Often, the loan amount is a small fraction of the actual cost of the item. So, even if you don’t pay the loan back, the pawnbroking does not suffer a loss.
These days there is a lot of pawnbrokers online, and you can access them through the internet. This makes it easier to carry out the initial conversation so that when you meet the pawnbroker, the time of the loan processing can be minimized.
How Pawnbroking Works?
The principle of pawnbroking is very simple. The borrower takes a valuable item to the pawnbroker, who calculates the amount of loan that can be offered on that item. Sometimes, these brokers leverage a pawn loan calculator to evaluate the loan amount.
In return of the pawned item, you are offered some cash and all the details of the loan are mentioned on the “Pawn Ticket“. This receipt also summarizes your loan terms, description of the item, expiration date, and the fee.
The items which are kept as collateral for the loan are securely stored by the pawn shops or pawnbrokers, and one need not worry about its safety. The pawnbrokers don’t use or sell the items till the loan term. But, if they don’t hear anything from the borrower during the entire term and there is no response to the communication attempts made by the pawnbroker, then, they use or sell the items. But, various attempts are made to contact the borrower and know about his decision about repaying the loan amount.
One of the basic requisites of pawn loans is that the borrower should be 18 years or above in age. Anyone below this age is not eligible for a pawn loan.
Repayment Of The Pawn Loan
For the repayment of the loan, every borrower has two choices:
- Payback the loan amount along with all the application fee before the loan deadline and get the item kept as collateral back.
- Don’t return to pay the loan back and the pawnbroker will keep your collateral item forever. Though, there are no legal consequences of not paying the loan back, but, you will lose the item kept as security. Not paying the loan does not invoke any collection action and there is no effect on your credit report as well.
Apart from the aforementioned two options, there is another option in which borrowers can renew the loan. In this scenario, one has to pay the interest owed on the original loan, and then the loan will start afresh with the new interest applicable on it. Now, the loan term will also get revised, and you would get another 4 – 7 months to repay the loan and get your item (kept as collateral) back.
How Are Interest Rates and Fees Calculated For Pawn Loans?
The pawn shops generally state regulated, and the finance charges or the rate of interest may vary from broker to broker. Typically, the pawnbroker interest rates charged at a rate of 5% – 25% per month. In some states, there is a lump sum capping on the interest rate. For instance, in Indiana, this rate is capped at 36% APR, but the pawnshops sometimes charge an additional monthly service charge.
The money by a pawnbroker is lent for a short-term, and this period is usually 3 – 4 months. Like the interest rates, the pawn loan’s fee is also calculated in different ways. The pawnbrokers in different areas calculate the fee differently. The fee is usually charged as storage or filing fee, and it ranges from 4% – 10%.
Which Items Can Be Kept As Security For Pawn Loan?
Though any item which has some monetary value can be kept as the security or collateral for acquiring the pawn loan, most commonly, people keep the following as the security:
- Valuable Pieces of Art
- Designer Goods
- Antiques
- Expensive and Branded Watches
- Gold, Silver or Diamond Jewelry
- Expensive Music Instruments
How To Search For A Pawn Broker?
These days, it has become very easy to search for pawnbrokers. As every business is becoming online and getting an online identity. You can also conduct an internet search for online pawn shop near me, and you will get the list of all the pawnbrokers in your area who can be approached for a loan.
pawn shop Compliance and Regulations
The pawnbrokers are governed by various laws, including all the major federal regulations which apply to the other entities designated as the financial institutions. These include:
- IRS regulations accentuating on reporting certain cash transactions
- Truth-in-Lending Act
- USA Patriot Act
- Bank Secrecy Act
- Trading With The Enemy Act along with related Executive regulations and orders
- Privacy Provisions required by Gramm-Leach-Bliley Financial Services Modernization Act
- Equal Credit Opportunity Act
- Data Privacy and Information Safeguard Consumer Information (part of Federal Trade Commission)
Apart from these laws and regulations, the pawn shops which deal with the firearms are regulated Bureau of ATF (Alcohol, Tobacco, Firearms, and Explosives). The pawn shops are being regulated by the States for decades, and most of the pawnbrokers are also regulated and licensed by the local authorities.