Pawnbrokers derive income principally from two or sometimes three income streams:
1. Interest and service charges on money lent. and
2. Profits on the sale of unredeemed merchandise, and
3. Profits from ancillary specialty services, such as:
– check cashing services
– paycheck advances
– money order sales
– portable phone and beeper sales
Simply described, pawnbrokers, also known as collateral loan brokers, make loans at relatively high interest rates based purely on the intrinsic value of the collateral. Checking the customer’s credit history is not necessary because only the value of the item being pawned is considered as collateral. If the borrower is unable to repay the loan plus the accrued interest within a given time period, the pawnbroker “forecloses” on the collateral and puts it up for sale.
A typical transaction begins with a potential borrower coming into a pawnshop with the item he or she wants to pledge. The pawnbroker then determines how much to loan the patron for the item. Loans are issued at a rate of about one-third to one-half of the price the broker can expect to receive for the sale of a good during the worst of times. This assures that the pawnbroker will make a profit.