Pawnbroking 101
What Is A Pawn?
Pledging an item in exchange for money
Pawning refers to the act of pledging an item in exchange for money. The pawnbroker holds the item as collateral until a future date (typically 30-90 days). The client has the option to redeem the item before that date by repaying the money advanced plus a fee for storage and handling.
Unlike a traditional loan there is no obligation to repay. In fact, there is no debt at all. If the client decides not to recover the item, it is considered sold to the pawnbroker for the agreed price. Pawns are very consumer friendly because there is no credit impact, collection process, or penalty charge. The non-recourse nature of pawning shifts all risk to the pawn broker. For example: if the sale of the item does not fully reimburse the pawnbroker, they absorb the loss with no claim against the client.
Pawning is the oldest and simplest form of credit tracing back hundreds of years. The roots of modern pawn shops started in 1464 AD with two Franciscan monks named Barnabo da Terni and Fortunato Coppoli. They provided collateral secured loans to the public so long as you tithed regularly to the church.
Why Use A Pawn Shop
Pawns provide a range of benefits including speed, convenience, and reliability.
Unlike a bank loan or credit application, most pawn transactions can typically be done in less than 30 minutes. This means that clients can meet their needs on the same day, often in the same hour. In today’s hectic world the ability to resolve an emergency quickly and easily is more important than ever.
Building on the above, convenience is also a factor. There are no complex applications, paperwork burdens or pre-qualifications. In addition, most pawn shops can assist people on a drop-in basis so there is no need for an appointment or booking. This makes for a simple, stress-free transaction.
Lastly, reliability plays an important part in the process. The collateral based nature of pawn shops allows them to bypass reliance on traditional models of creditworthiness. Pawnbrokers can assist clients that conventional lenders would view as “un-bankable”. This provides clients with peace of mind and the surety that there is a solution for their situation. If someone has an asset and a piece of government identification there are strong odds a pawn shop can help them.
Who Uses Pawn Shops?
Pawn clients are regular people faced with irregular circumstances.
Much of the following information is from the 1998 study “Pawnbroking in the U.S.: A Profile of Customers.” produced by the Credit Research Center at Georgetown School of Business, Georgetown University. The study analyzed current and former pawn clients as well as regional shoppers as a control group. The initial data answered two key questions: who uses pawnshops and why?
“The pawnshop sample was much younger than the general population . . . The vast majority of respondents (78.4 percent) were under 45 years of age, an age group that typically faces expensive family formation/child rearing demands. They were going to pawnshops not only for loans but also to shop.”, P37
“Pawnshops borrowers, who have ranged from princes to peons, have one common characteristic. They do not have financial savings to meet what they regard as pressing, short-term liquidity needs.”, P29
The results provide key information to understanding the value pawn shops offer to the public. Pawn clients do not have enough financial liquidity to address unexpected expenses. Just as importantly: they are young adults facing costs related to living independently, family growth, housing, and building their place in the world. They are also typically employed, falling within 2.1% of baseline employment rates. They work and contribute to the community.
However, one of the key differences involves employment history. Compared to the “shop only” control group pawn clients have dramatically higher rates of work transition or instability. For example:
- 1.97X higher rates of lay off
- 2.6X higher rates of termination
- 1.44X higher rates of quitting
- 1.3X higher rates of new employment
Most pawn clients face problems related to personal financial instability. No other mainstream lending model will provide service to a client that does not have a stable work history. Perhaps more importantly: former pawn clients align quite closely with the “shop only” control group. This lends significant clarity to the fact that pawns are not “debt cycle” transactions. Instead, they resolve specific, temporary needs.
There is also clarity in understanding the total audience for the pawn service. In his 1994 book “Fringe Banking: Check-Cashing Outlets, Pawnshops, and the Poor”, John P. Caskey said the following:
“…estimates suggest that pawnshops provide significantly less than one percent of consumer credit in the United States. By other measures, however, pawnbroking plays an important role in U.S. Credit markets. The data suggest, for example, that pawnshops made about 42 million loans in 1991. Even allowing for multiple loans to a core group of customers, pawnshops clearly serve several million Americans each year, perhaps as much as 10 percent of the adult population . . .”, P49
It’s clear that a significant portion of Canadians are also underserved by traditional banking. Moreso: given the research it seems nearly impossible for banks to help those clients. Using the population model above it would seem that some ~3.8 million Canadians will cross a pawnshop door in their lifetime.
How do Pawns Differ From Payday Loans
Pawns and payday loans address similar client needs but they are significantly different products.
Pawning offers a broad range of advantages to clients. For example:
- Payday Loans create debt because there is an obligation to repay. This is not true for pawns.
- Payday loans have a shorter term (typically 2 weeks or less). Pawns allow clients to stabilize financially be providing much longer repayment periods.
- It is not possible to pawn the same item multiple times. This protects people from destructive practices like obtaining overlapping or multiple payday loans on the same cheque.
- Pawns do not result in credit judgements, wage garnishment, collection fees or similar penalties.
- Pawns do not borrow against a person’s future earnings, so their financial stability is not under threat.
- Pawn loans are pre-meditated. The client balances their need for funds with the temporary surrender of a personal asset. This is not reckless borrowing but a careful, calculated decision on the part of the client. This is in sharp contrast to payday and instalment loans where a signature is all it takes to cause dramatic, lasting financial impact
