Behind The Scenes

How Do Pawn Shops Work?

The pawn business is, first and foremost, a business. It has many of the same concerns as any other business, such as payroll, utilities, insurance, licensing, and other various operational costs. Additionally, reputable pawn shops must also keep records of every item that comes into their possession. They must also maintain records on every person who has pawned or sold an item in their stores. They also have other regulations and requirements depending upon the state they call home that are unique to the pawn industry. 

For these reasons, successful pawn shop operators must be extremely discerning when considering an item for loan collateral or purchase. Multiple factors are accounted for when making this decision, and very few people outside of the industry are aware of the inner workings of this process. Popular reality programs show the haggling, loan and purchasing aspects of the industry, but they do not get into valuation, demand, and more.

For example, loans are granted based upon demand, resale value, and other mitigating factors. Whenever a loan is considered, every factor must be taken into account to maintain the viability of the business. One of these is the possibility, however remote, that the loan may not be repaid. This is not a judgment of the individual by the pawnbroker, but a marked and verifiable reality within the industry.

How Value Is Determined

Some items do have a regular and consistent value. These include gold and diamonds, among others. However, items such as televisions, computers, and gaming systems lose value very quickly. Due in part to regular and frequent advancements in technology, many electronics lose value the moment they are purchased. This is why a top of the line television is only worth a small fraction of its purchase price when seeking resale. A big screen plasma television may have cost thousands five years ago, but today it may only be worth a small fraction of that sum. This is why many electronics, most tools, and other similar items are considered high risk investments for a pawnbroker.

Risk is determined by examining the resale value of a specific item, as well as the local demand for that item, current inventory, and so on. If the item is worth the risk, the broker will then make an offer. Sometimes this is less than the current owner was expecting, and that can occasionally lead to hard feelings. However, to make the purchase worthwhile the pawnbroker must buy at a fraction of the current value, accounting for the risk, and then sell at a price that will be competitive yet profitable.

The Bottom Line

Like all businesses, a pawn shop exists to make the owner money. Reputable pawn shops differ from other businesses because they were founded on meeting the needs of their communities that are otherwise overlooked. While not all items can or will be accepted, those that are will certainly put money in the pockets of those community members trying to get through a hard time.