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A pawnbroker (or pawnshop) is an individual or business that offers secured loans to people, with items of personal property used as collateral. The word pawn is derived from the Latin pignus, for pledge, and the items having been pawned to the broker are themselves called pledges or pawns, or simply the collateral.

If an item is pawned for a loan, within a certain contractual period of time the pawner may purchase it back for the amount of the loan plus some agreed-upon amount for interest. The amount of time, and rate of interest, is governed by law or by the pawnbroker's policies. If the loan is not paid (or extended, if applicable) within the time period, the pawned item will be offered for sale by the pawnbroker/secondhand dealer. Unlike other lenders, though, the pawnbroker does not report the defaulted loan on the customer's credit report, since the pawnbroker has physical possession of the item and may recoup the loan value through outright sale of the item. The pawnbroker/secondhand dealer also sells items that have been sold outright by customers to the Pawnbroker or secondhand dealer.

Contents

Business model

Assessment of items

The pawning process begins when a customer brings an item into a pawnshop or pawn shop. Common items pawned (or, in some instances, sold outright) by customers include jewelry, electronics such as televisions, car stereos, speakers, computers and video games, DVD movies, music CDs, musical instruments (often popular music instruments such as electric guitars and basses and keyboards), and tools (both hand tools and power tools). In the US, pawnshops with firearms licences sell pistols and rifles to customers who meet state and federal acquisition criteria. In other countries, though, such as Canada and the UK, pawnshops do not sell firearms. Gold, silver, and platinum are popular items which are often purchased; even if the source (such as a piece of broken jewelry) has little value, the metals can still be sold in bulk to a bullion dealer or smelter for the value of the gold, silver, or platinum content. Similarly, with jewelry that contains genuine gems, even if the jewelry is broken or missing pieces, the jewels may have value in their own right because they can be reset into a new item of jewelry.

The pawnbroker assumes the risk that an item purchased was actually stolen property. However, laws exist in many jurisdictions that protect both the community at large and the brokers from unknowingly engaging in criminal activity (buying and selling stolen goods). These laws often require the pawnbroker to establish positive identification of the seller through photo identification (such as a driver's license or government-issued identity document), as well as a holding period placed on an item purchased by a pawnbroker (to allow for local law enforcement authorities to track down stolen items). In some cities, pawnshops must give a list of all newly-pawned items and their serial number to the police, to allow the police to determine if any of the items have been reported as stolen. Many police departments will advise burglary or robbery victims to visit local pawnshops to see if they can locate stolen items which might have been pawned or sold to the pawnbroker. If such items are located they, in most cases, are returned to victim with or without compensation to pawnbroker depending on local laws. The person who sold or pawned such items is investigated by local law enforcement. Some pawnshops set up their own screening criteria to avoid buying stolen property. In some areas where there is a great deal of bike theft, for example, pawnshop owners may decide not to accept used bikes, because the likelihood of them being stolen is too high.

The pawnbroker assesses an item for its condition and saleability by testing the item (in the case of electronics or instruments) and examining it for flaws, scratches, or other damage. Another aspect that affects saleability is the supply and demand for the item in the community or region. In some areas, the used goods market is so flooded with used stereos and car stereos, for example, that pawnshops will only accept the higher-quality brand names. Alternatively, a customer may offer to pawn an item which will be difficult to sell, such as a surfboard in an inland state or a pair of snowshoes may be offered to a pawnshop in a southern state. The pawnshop owner will either turn down hard-to-sell items or offer a very low amount of money for these items. While some items will never get outdated, such as hammers and hand saws, electronics and computer items can quickly get out of date and become unsaleable. As such, pawnshop owners have to learn about the different makes and models of computers, software, and other electronic equipment, so that they can discern between items which are still salable, and those which are obsolete (e.g., a 386 computer).

To assess the value of different items, pawnbrokers use guidebooks ("Blue Books"), catalogs, Internet search engines, and their own experience to subjectively evaluate the goods. Some pawnbrokers have training in the identification of gems, or they employ a specialist with gem training to assess jewelry. One of the risks when accepting secondhand goods is that the item may be counterfeited or stolen. If the item is counterfeited, such as a fake Rolex watch, it may have only a fraction of the value of the genuine item. If the item is stolen property, the police can recover it to return it to the rightful owner. Once the pawnbroker has determined that the item is genuine, not likely to be stolen, and that it is saleable, the pawnbroker offers the customer an amount for it. The customer can either sell the item outright if (as in most cases) the pawnbroker is also a licensed secondhand dealer, or offer the item as collateral on a loan.

Determining amount of loan

To determine the amount of the loan, the pawnshop owner needs to take into account several factors. One factor is the predicted resale value of the item. This is often thought of in terms of a range, with the low point being the wholesale value of the used good, in the case that the pawnshop is unable to sell it, and they decide to sell it to a wholesale merchant of used goods. The higher point in the range is the retail sale price in the pawnshop. For example, a five-year old 42" Sony TV may have been bought by the customer for $1000. However, as a used item in a pawnshop, it will only fetch $250 and $300, because the customers will be wary that it might be a "lemon" that the seller is getting rid of because it has some hard-to-detect problem. Used electronics wholesalers will buy the TV for $100 to $150. The wholesaler pays a lower price than the retail value because they have the added cost of hiring electronics technicians who overhaul and repair the items so that they can be sold in used electronics stores.

The pawnshop owner takes into account their knowledge of supply and demand for the item in question to determine if they think that they will end up selling the TV for $100 to a wholesaler or $300 to a pawnshop customer. If the pawnshop owner believes that there are "too many used TVs around these days in town", they may fear that they will only get $100 for the TV if they have to unload it to a wholesaler. With that figure in mind as the expected revenue, the pawnshop owner has to factor in the overhead costs of the store (rent, heat, electricity, phone connection, yellow pages ad, website costs, staff costs, insurance, alarm system, etc), and a profit for the business. As such, the customer who comes in with this TV that they paid $1000 for when it was new may be offered as little as $50 by the pawnshop owner, who is taking into account all of the risk and cost factors.

In determining the amount of the loan, the pawnshop owner also assesses the likelihood that the customer will pay the interest for several weeks or months and then return to repay the loan and reclaim the item. Since the key to the pawnshop business model is making interest off of the loaned money, pawnshop owners want to accept items that the customer is likely to want to recover, after having paid interest for a period on the loan. If, in an extreme case, a pawnshop only accepted items that customers had no interest in ever reclaiming, it would not make any money from interest, and the store would in effect become a second hand dealer.

Determining if the customer is likely to return to reclaim an item is a subjective decision, of course, and wily customers may attempt to persuade the pawnshop owner that the item in question is important to them ("that watch belonged to my grandfather, so I will certainly return for it"), and they will claim that they will return to recover it. The pawnshop owner can use a variety of factors to evaluate the likelihood that the customer will return, such as whether the customer lives in the neighborhood or whether the customer has a good track record of returning to the pawnshop to recover items. Some customers may return several times over a year and pawn the same valuable item as a way of borrowing money, and they return each month to pay the interest and recover the item.

As well, the pawnshop owner can assess the item and the pawner; if a non-disabled twenty year-old male comes into the pawnshop to pawn an electric wheelchair (perhaps the possession of his late grandfather), the pawnshop owner may doubt the man's claims that he will return for the wheelchair. On the other hand, if a middle aged man pawns a top quality set of golf clubs, the pawnshop owner may assess it as more credible that he will return for the items. The saleability of the item and the amount that the customer wants for it are also factored into the pawnbroker's assessment; if a customer offers a very salable item at a low price, the pawnbroker may accept it even if it is unlikely that the customer will return, because the pawnshop can turn around a quick profit on the item. Of course, if a customer offers a top quality, brand-name valuable at too low a price, such asking for $50 for a $900 Tag Heuer watch, the pawnbroker may turn down the offer, because this suggests that the item may either be counterfeit or stolen.

Pawnbroker in Reseda, CA

Inventory management

Pawnshops have to be careful to manage how many new items they accept as pawns. If the amount of items in a pawnshop's inventory is examined along a continuum, one can argue that both extremes are undesirable. One end of the continuum is a pawnshop with very few items in the shop. Perhaps the pawnshop mostly buys jewels and gold which are then reset and smelted, or perhaps the pawnshop owner quickly sells most of the items using specialty shops (e.g., musical instruments are sold to used music stores and stereos are sold to used hi-fi audio stores). In this case, the pawnshop will not be very interesting to customers, because it will be a mostly-empty store with bare shelves and counters. Customers walking by a near-empty store will be less likely to be intrigued by the merchandise and come into the store.

On the other extreme, if a pawnshop has a huge amount of inventory, there can be several disadvantages. If the store is crammed with used athletic gear, old stereos, and old tools, the store owner has to spend more time and money shelving and sorting the items, displaying them on different stands or in glass cases, and monitoring customers to prevent shoplifting. If there are too many low-value, poor quality items, such as old toasters, scratched-up 20 year-old TVs, and worn-out sports gear piled into cardboard boxes, the store may begin looking more like a low-end rummage sale or flea market. Small, high-value items such as iPod players or cell phones need to be put in locked glass display cases, which means that the owner may need additional staff to unlock the cabinets and get out items that customers want to examine. As a store becomes more and more filled with items, an owner has to take more steps to protect inventory from theft by hiring staff to supervise the different parts of the store and/or by installing security cameras or alarms. The biggest problem with accumulating too much unsold inventory, though, is that this means that the store has not been able to pull out the value of these items by reselling them, which provides the store with cash that can be loaned out to borrowers.

As such, the better option lies in the middle of the continuum. A store that has a moderate amount of good quality, brand-name items arranged neatly in the display windows attracts passersby, who are more likely to come in to peruse the items for sale. If the items are attractively laid out in display cases and shelves in an uncluttered fashion, the pawnshop has a more professional, reputable appearance. Once passersby start coming to the store to look at items, they may decide to bring unwanted items to the pawnshop for loans on subsequent visits. Some pawnshop owners prevent their store from developing a cluttered look by keeping some of the less attractive items such as snow tires, or items which are overstocked (e.g., if there are too many stereos) in a storage facility in the basement. Another approach used by some pawnshop companies is to operate a number of stores in a state or province. This way, the inventory can be moved between affiliated stores so that each store has a balanced inventory. For example, if a rural location of a pawnshop accumulates too much hunting and fishing gear, some of the overstock can be transferred to a suburban location.

Some stores also slim down their inventory by selling some items to specialty used gear retailers. For example, if a pawnshop in a low-income neighborhood pays a customer $300 for a power amplifier that has a used retail value of about $2000, this stereo device may be hard to sell in the pawnshop, given that most of the stereos sell for a fraction of this price. However, a high-end used audio store in a well-to-do neighborhood might be able to sell it for $2000, so the pawnshop owner may decide to sell the amplifier to the audio shop for $1000, thus netting $700. Some pawnshops may sell specialty items on eBay or other websites. A specialty item such as a high-end model railroad set with a retail value of $1000 may not sell in the store, or it would only sell for a deep discount. However, if it is put up for sale on eBay or a similar website, a model train enthusiast 1000 miles away may decide to purchase the item and have it shipped to them.

Ancillary operations

While the main business activities of a pawnshop are lending money for interest based on valuable items that customers bring in, some pawnshops also undertake other business activities, such as selling brand-new retail items that are in demand in the neighborhood of the store. Depending on where a pawnshop is located, these other retail items may range from drug paraphernalia (rolling papers, glass pipes, wire mesh pipe screens, etc) to hip hop clothing ("urban wear") or biker-style clothing, such as Harley-Davidson branded t-shirts or other motorcycle accessories such as "do rags". Some pawnbrokers also sell brand-new weapons of various types, including throwing stars, switchblades, butterfly knives, knuckle dusters, etc., despite the questionable legality of some of these items. Many pawnshops will also buy or trade used items, as long as the transaction is to the benefit of the pawnshop. In cases where the pawnshop buys items outright, the money is not a loan; it is a straight payment for the item. Some pawnshops may keep a few unusual, high value items in the display window to capture the interests of passersby, such as a vintage Harley Davidson motorcycle; the owner is not typically expecting to sell these items. Other activities carried out by pawnshops are financial services including fee-based check cashing, payday loans, vehicle title or house title loans, and currency exchange services.

History

In the west, pawnbroking existed in the Ancient Greek and Roman Empires. Most contemporary Western law on the subject is derived from the Roman jurisprudence. As the empire spread its culture, pawnbroking went with it. Likewise, in the East, the business model existed in China 3000 years ago[1] no different than today, through the ages strictly regulated by Imperial or other authorities.

In spite of early Roman Catholic Church prohibitions against charging interest on loans, there is some evidence that the Franciscans were permitted to begin the practice as an aid to the poor. In England, the pawnshop came in with William the Conqueror, with an Italian name, Lombard. In 1338, Edward III pawned his jewels to the Lombards to raise money for his war with France. King Henry V did much the same in 1415. The Lombards were not a popular class and Henry VII Tudor harried them a good deal. In the very first year of James I Stuart an Act against Brokers was passed and remained on the statute-book until Queen Victoria had been on the throne thirty-five years. It was aimed at the many counterfeit brokers in London. This type of broker was evidently regarded as a fence. It is also known that Queen Isabella of Spain pawned her jewelry in order to send Christopher Columbus out to what he believed was the Indies.

Modern pawnbroker storefront.

A pawnbroker can also be a charity. The Monte de Piedad movement began in Perugia, Italy in 1450 with the Orden de Menores Observantes de San Francisco. It had the aim of providing financial assistance to people in the form of no-interest loans, secured with pawned items. Instead of interest, borrowers were urged to make donations to the Church. It spread first through Italy then in other parts of Europe. The first Monte de Piedad organization in Spain was founded in Madrid, and from there the idea was transferred to New Spain by Pedro Romero de Terreros, the Count of Santa Maria de Regla[2] and Knight of Calatrava.[3] The Nacional Monte de Piedad is a charitable institution and pawn shop whose main office is located just off the Zocalo, or main plaza of Mexico City. It was established between 1774 and 1777 by Pedro Romero de Terreros as part of a movement to provide interest-free or low-interest loans to the poor. It was recognized as a national charity in 1927 by the Mexican government.[3] Today it is a fast-growing institution with over 152 branches all over Mexico and with plans to open a branch in every Mexican city.[4]

In the United Kingdom, typical high street pawn interest rates vary between 5% (79.59% AER[5]) to 12% (289.6% AER) gross per month and the average annual equivalent rate is 85%.[6] The pawnbroker in the United States is generally subject to considerable legal restriction. Each state has its own regulations regarding pawnbrokers, generally regulating the amount of interest that is allowed to be charged on a collateral loan. In Massachusetts, a 2007 Boston Globe investigation suggested 10% monthly interest was not uncommon.[7] In the state of New York, interest at pawnshops is limited to 4% per month.[8] Towards the end of 2008 saw the advent of the Online Pawnbroker and the rise in these Pawn Brokers offering their services for luxury goods to City workers who had been affected by the economic downturn [9]

Symbol

Symbol of pawnbrokers.

The pawnbroker's symbol is three spheres suspended from a bar. The three sphere symbol is attributed to the Medici Family of Florence, Italy, owing to its symbolic meaning of Lombard.[1] This refers to the Italian province of Lombardy, where pawn shop banking originated under the name of Lombard banking. The three golden spheres were originally the symbol which medieval Lombard merchants hung in front of their houses, and not the arms of the Medici family. It has been conjectured that the golden spheres were originally three flat yellow effigies of byzants, or gold coins, laid heraldically upon a sable field, but that they were converted into spheres to better attract attention.

Most European towns called the pawn shop the "Lombard". The House of Lombard was a banking family in medieval London, England. According to legend, a Medici employed by Charlemagne slew a giant using three bags of rocks. The three ball symbol became the family crest. Since the Medicis were so successful in the financial, banking, and moneylending industries, other families also adopted the symbol. Throughout the Middle Ages, coats of arms bore three balls, orbs, plates, discs, coins and more as symbols of monetary success. Pawnbrokers (and their detractors) joke that the three balls mean "Two to one, you won't get your stuff back".

Saint Nicholas is the patron saint of pawnbrokers. The symbol has also been attributed to the story of Nicholas and the three bags of gold.

In Asia

A typical Hong Kong pawn shop sign: a bat holding a coin.
Pawn shop in Hong Kong

In Hong Kong the practice follows the Chinese tradition, and the counter of the shop is typically higher than the average person for security. A customer can only hold up his hand to offer belongings and there is a wooden screen between the door and the counter for customers' privacy. The symbol of a pawn shop in Hong Kong is a bat (the animal) holding a coin (Chinese: 蝠鼠吊金錢, Cantonese: fūk syú diu gām chín). The bat signifies fortune and the coin signifies benefits. In Japan, the usual symbol for a pawn shop is a circled digit seven, as "shichi", the Japanese word for seven, sounds similar to the word for "pawn" ().

In India, the Marwari Jain community pioneered the pawnbroking business, but today others are involved; the work is done by many agents called "saudagar". Instead of working from a shop, they go to needy people's homes and motivate them to become involved in the business. Pawn shops are often run as part of jewelry store. Gold, silver, and diamonds are frequently accepted as collateral. Pawnbroking is also a traditional trade in Thailand.

Popular culture

Pawn Stars, an American reality television series (2009) appearing on the History Channel, chronicles the daily activities at the Gold and Silver Pawn Shop in Las Vegas, Nevada.

See also

References

  1. ^ a b "History of Pawnbroking". Roath's Pawn Shop. http://www.roaths.com/pawnbroking.htm. Retrieved 2008-08-05.  
  2. ^ Leon Teutli Ficachi. "Nacional Monte de Piedad" (PDF). http://www.anahuac.mx/clares/archivos/nacionalmontedepiedad.pdf. Retrieved 2008-10-01.  
  3. ^ a b Alvarez, Jose Rogelio (2000). "Nacional Piedad de Monte". Enciclopedia de Mexico. 10. Mexico City: Encyclopedia Brittanica. pp. 5699–5701. ISBN 1-56409-034-5.  
  4. ^ "Dispone Monte de Piedad de 905 mdp para préstamos" (in Spanish). Torreon: El siglo de Torreon. http://www.elsiglodetorreon.com.mx/noticia/321965.dispone-monte-de-piedad-de-905-mdp-para-prest.html. Retrieved 2008-10-01.  
  5. ^ "Interest Rate Converter". Stoozing.com. http://www.stoozing.com/mon2yr.htm.  
  6. ^ Walne, Toby (2004-11-12). "Pawn Shop Rip-off". This is Money - Associated Newspapers Ltd. http://www.thisismoney.co.uk/news/article.html?in_article_id=394386&in_page_id=5. Retrieved 2007-01-02.  
  7. ^ Roberson, Donna (2007-04-30). "State fails to curb usurious pawnshop rates: Little oversight as poor bear brunt". Boston Globe. http://www.boston.com/news/local/articles/2007/04/30/state_fails_to_curb_usurious_pawnshop_rates/?page=1.  
  8. ^ Fernandez, Manny (September 14, 2007). "Cash to Get By Is Still Pawnshop’s Stock in Trade". New York Times. http://www.nytimes.com/2007/09/14/nyregion/14pawn.html. Retrieved 2007-09-14.  
  9. ^ http://www.ft.com/cms/s/0/4959516c-fc5f-11dd-aed8-000077b07658.html?nclick_check=1 Rise in Online Pawnbrokers







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