Understanding Pawn Shops--How They Work

Pawn shops are a business, alright, and most of them are legitimate, despite the seedy reputation indicated in the movies. I'm sure there are those kinds of establishments, willing to take in items of questionable ownership. However, the majority are businessmen and women, just as interested in making a living as anyone else.

Due to the popularity of the currently running series on TV's History Channel, "Pawn Stars," featuring a Las Vegas Pawn shop and its owners, I would have thought that people would have wised up. My husband and I are very interested in collectibles and antiques, so it is one of our favorite shows.

At least twice during each episode, I want to be able to reach through the screen, grab a customer by the neck, shake them and yell "YOU IDIOT!" at them. Do the people who walk through the doors of that shop not watch the show? Have they learned nothing? Or are they really that greedy?

If you want to pawn an item, whether it is your great-grandfather's antique pocket watch with an "absolutely amazing story" behind it, or your beloved collection of comic books from your childhood, the only thing that really matters is not your story, but the actual demand for the item in the secondary market.

In pawning, you are trying to raise some cash temporarily to cover an urgent need. You want cash, for whatever reason, and you want it right now. So, you take your family treasures to your local pawn shop in the hopes of raising that cash.

Using a pawn shop amounts to getting a loan without going through the hassles, paperwork and credit checks required by banks and other financial institutions. You get hard cash on the spot, but you also carry a much higher risk, as well as standing to get a lot less money than you might want.

First, the proprietor and/or an appraiser will evaluate your item on several points, which may include, but not be limited to:

• rarity
• material
• authenticity
• demand
• retail price range

Once the deal is struck, and you agree to pawn the item, the dealer will quote you a price based upon a percentage of that retail price, and that is the amount you will be loaned. You will be given a claim ticket, your item gets marked with the other half of the ticket, and disappears into their back room.

You'll be given a specified amount of time to repay the loan and retrieve your item. You will also pay interest, and in some cases, other fees. The amount of interest charged is usually regulated by state laws.

If you fail to come up with the money to get your item back in the specified time frame, ownership transfers to the pawn shop, and they are free to sell it at retail on the second-hand market. The only up-side to this is, because they have your property and can recoup their loan by its sale, you won't have to worry about the failure to repay showing up on any credit reports.

It is this type of transaction that constitutes the majority of caes in the above-mentioned TV show. And this is where I sit and shake my head in wonderment at the combined greed and stupidity of the people trying to sell their items.

If the pawnbroker is not certain of the value, authenticity or demand for any given item, they will refer to an expert in the field...at least the good and reputable ones will do so. Here is where things get interesting.

Sometimes, a person will come in with a fairly high-value item, and the expert will tell them something like, "At auction, I've seen these gizmos go for upwards of $4,000." The would-be seller then gets a smug grin on their face, and when the pawnbroker thanks and dismisses the expert, turns back to the customer and asks, "So, what do you want for this item?" About 90% of the time, the person will reply, "Well, you heard the man--he said $4,000, so that's what I want!"

No, folks, that's not how it works. Refer back to the list in the second section, and note that the final item in determining the value says retail price. That's the amount the pawn shop expects they can sell your gizmo for in a best-case scenario. It is not the price you are going to get--not even close.

Expect to get not more than half or a third of that estimated retail value. Why? This hardly seems fair, does it?

Well, yes, it is. You must remember, the pawn shop, as I said at the start, is a business, and they are in business to make a living. Not only do they have the very high expenses of all the money they pay out for merchandise on a daily basis, they also have overhead just like any other business. This includes the usual things:

• rent or mortgage on their building space
• utilities and phone
• salaries for employees
• insurance
• office supplies
• security

Besides that, they also have all those pawned items in the back room. They don't know if the money will be coming back in, or if they will have to attempt to sell those things later on. In either case, the money paid out as loans on those items is tied up, just sitting there, and not available for their operating expenses.

Then, there is the inventory they have purchased outright. Some items may be in high demand, and turn over quickly; others may have been a bad guess, and sit around collecting dust for months or even years before a sale is made to recoup some of their cash.

Suppose now, that you are on the other side of the transaction, and wander into a pawn shop looking for some unique item that can't be found in the mall.

Just as with selling an item to them or pawning it, there can be some amount of haggling over the price you are willing to pay.

This poses risk for the shopkeeper, as they have to have guessed correctly about the price an item will fetch, and if they are wrong, they lose money on the deal, on top of that money having been tied up until you waltz yourself in to make a purchase. It really is a very high-risk business to be in, financially speaking.

Not only are there money risks to consider, but shop owners must stay abreast of complex laws governing what they may and may not sell. Some of these rules and laws vary by state, and some by the type of license the shopkeeper has for their business.

For example, at the shop featured in the show "Pawn Stars," they are not allowed to handle any firearms except certified antiques. Great-great grandpa's Civil War rifle? Sure--just fine. A modern-day pistol? No, not at all.

Adding to their financial risk is that every item that enters their posession, whether as a pawned or purchased item, must be run through police checks against lists of stolen property, and sit for a full month as this process is completed. Only then can their purchases be put up for sale.

Forewarned is forearmed, as they say, so please, if you decide to pawn something, remember, they are in business to make money, just like the rest of us.

Don't walk into their store expecting pie-in-the-sky top dollar for your item. If you really want the highest and best price, then you are better off selling whatever it is on your own as a private party directly to another private party, by any of the various means available to you.