If you have ever used a pawn shop’s services you may wonder how they make money while offering such low prices. There are two main ways pawnbrokers make their money. They have both a retail service on second hand items and they offer collateral loans to their customers.
For most pawnbrokers the lending portion of their business is where they make the bulk of their money. Here is how the pawn shop model works.
Selling Inventory – The inventory you see on a pawnbroker’s shelves is inventory they have purchased from customers just like you. While many people believe the items for sale in a pawn shop come from people who were unable to repay their loans, this occurrence is actually fairly rare. Some of the merchandise for sale does come from customers who opted not to repay their loans and the pawnbroker now must try to sell the item to recoup the money spent on the loan. Some of merchandise comes from purchases. When a customer wants to sell an item the pawnbroker determines the resale value of the item and offers the customer a price that will allow them to then sell the item in their store for a reasonable profit.
Pawn Loans – Pawn loans tend to bring a bit more profit in for the pawnbroker and actually allows them to sell their retail items to you for even a little less. In order to obtain a pawn loan customers bring in items of value. The pawnbroker will determine the value of the item and offer the customer a loan that is reflective of this value and what the pawnbroker believes they will be able to resell the item for if the loan is not paid. The idea is for the pawnbroker to give the customer the most amount of money while mitigating the risk for any loss. Interest is charged during the duration of the loan and this interest is where pawnbrokers make their profits. This same pawn shop model or a version of it has been around for centuries. Pawnbrokers are able to offer small dollar loans that banks cannot to help people with emergencies. Additionally, pawn shops offer discounted merchandise to the general public.