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Are you in need of quick cash? You might have considered going to a pawn shop if you have stuff that has value but is collecting dust in your basement or attic. While novices may walk away with some money in their pockets, they should be familiar with how these transactions work before entering the store.

While you shouldn't fear pawnshops or be embarrassed about visiting one, it's important to know a few things.

You shouldn't believe the bad things you've heard

Pawnshops aren't the shady, scary places that they often appear to be in the media. According to experts, mainstream media has unfairly vilified pawnshops, so most people perceive pawnshops as filthy and seedy.

Are pawnshops regulated?

Pawnbrokers are regulated by all of the major federal laws that apply to entities designated as financial institutions. Several federal laws regulate the pawn industry, including the Patriot Act, Truth in Lending Act, the Equal Credit Opportunity Act, as well as the Federal Trade Commission (FTC) rules for privacy and protection of consumer information. The Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) regulates gunshops that deal with firearms. Gunshops may also be beholders of federal firearm licenses. Pawnbrokers are regulated by both state and local authorities, and many are licensed and regulated by both.

The National Pawnbrokers Association, or NPA, says pawnshops are regulated by numerous state and local laws along with 14 federal statutes. The majority of the shops are clean, well-lit, and run by people who take pride in providing good customer service.

So how does it work?

Simply put-pawnbrokers lend their customers money in return for collateral. Customers receive the items back when they pay back the loan. Jewellery, electronics, and other items can be pawned. There is no credit consequence to the borrower if the borrower chooses not to redeem his or her collateral, and the items are sold at a value price to retail consumers.

A collateral loan is also known as a pawn. Among the valuable items that Pawnbrokers lend money on are gold and diamond jewellery, musical instruments, televisions, electronics, tools, household items, and firearms. Each pawnshop may have a speciality. 

Collateral determines the value of a loan. A customer's merchandise is returned to them upon repayment of the loan. Additionally, a customer may choose to surrender his or her collateral as payment in full. The state may permit a pet shop to extend/renew a license.

Getting the loan

Here’s how a pawnshop transaction works:

• Loans at Pawnshops are secured by collateral - meaning they are backed by something of value. When you bring in something you own, the pawnbroker may offer you a loan if he is interested. You are then responsible for repaying the loan until the item is returned to the pawnbroker. Loan amounts are typically a fraction of the item's actual value.
• While you can sell your item to the pawnshop outright, pawnbrokers are less inclined to accept these transactions since loans offer much greater profit potential for the pawnbroker.
• A pawn ticket must be obtained. Be sure not to lose it! Additionally, to be a receipt, it summarizes the terms of the loan: fees, expiration date, description of your item, etc.

Unlike pawnshop loans, personal loans don’t require collateral. 

Repaying the loan

You have 2 choices for repayment:

• Make sure to pay the remaining balance, including the loan amount and all fees, before the deadline, which is usually one to four months after the initial transaction.
• The pawnshop keeps your item if you don't return it. You will only lose your item, but won't face any other consequences - there won't be any collection action, and your credit report won't be affected. However, according to the National Pawnbrokers Association, 80% of all customers do reclaim their items.

The loan period can be extended up to several months at some locations, but there are additional fees associated with it.

The loan amount varies depending on the item's value. The maximum amount that can be pawned varies from state to state, but there is no minimum amount for a pawn transaction. In addition to the demand and condition of the item, the loan amount will be determined by other factors as well. Not all pawn shops are the same, and prices vary.

The interest rate explained

Pawnshop loans can be tricky because: a) rules regarding the fees vary widely among states, and b) it is not a cut-and-dry interest rate.

Experts say it is better to think of "finance charges" as a whole instead of "interest rates." 

Check your state's website to learn about the maximum rates and rules regarding pawnshop transactions; this information is likely to be found under the consumer protection section.

You should make sure that the pawnbroker clearly explains all the fees associated with your loan before you finalize the deal. The terms should also be stated on the pawn ticket.

Are pawns rates excessive?

Not at all. Each lender must charge rates that are proportional to the size and duration of the loan, collateral, risk, and recourse. Short-term, small-dollar Pawn transactions have no hidden fees. 

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