Pawn Loan 101

If you asked me a few years ago what a pawn shop was, I would have said it was a place where you sold your stuff in exchange for money. I was right and wrong. Right, because you can sell your items. Wrong, because you can also borrow money by putting up an item as collateral and a pawn shop sells stuff too.

Prior to my first pawn experience, I knew a bit about pawning because I ran some errands for my mother one of which was paying for the interest of her loan before the maturity date. But when I had to pawn some jewelry on my own, I remember thinking, "Is this the way it's done? Is this the highest offer I can get on my jewelry? Is this even safe?" I sure wish I got some advice then, because I had no idea what to expect or what to do. So what should you know as a first-time pawner?

Number one, please make sure the pawn shop is legit. I cannot stress how many sob stories I've read and heard about pawn shops running away with people's valuables. Look for a business permit and/or license. It should be displayed for consumers to see. Two, know the reputation of the company. Are they well known? Do they have other branches? Those would be good signs to look out for because you know they're established in the industry. Three, Location! If you're going to pawn your stuff, make sure that the place itself and its surroundings (the street, road, neighborhood, etc) are safe and well-guarded. It shouldn't look run-down and creepy. You wouldn't want to have your stuff stolen even before you get to the pawn shop. We wouldn't want it to be stolen during your loan period either, so make sure the place has a safe, has grills between the customers and the pawn people (the staff of the pawn shop, I dunno what you call them), is cemented all around, not made of wood. Why did I mention this detail? I remember watching the news one time and the pawnshop's ceiling was made of WOOD. It had a second floor which was a residential area. The tenants/theives sawed through their floor, took everything in the safe and fled. Damn. I would have never thought that people could do such a thing. But I would never have pawned my stuff there! Nuh-uh, not in a million years. The place itself looked like it was where theives sold their goods for quick cash. I'm quite picky actually and I like to play safe. So far so good. When in doubt, get a second opinion and a third and a fourth. Do your research. It doesn't hurt to be sure (and extra extra careful!)

With that out of the way, let's talk about the loan and payment part of the pawn. (Sorry, if I don't get the terms right but I'll try to explain as clearly as I can.) First, have your item appraised. I suggest you know the worth of your item before you go in so you have an idea of how much you should be getting. They may not give you the whole value of it, since you're not selling it. But it should be somewhere close I guess. The best item to have appraised is gold, since its value never (or barely) depreciates. Not so sure about diamonds and silver. Other specialty pawn shops accept cellphones, cars, houses (obviously you'll just give them the title deed), designer bags, etc. Have a look at the yellow pages, you might be able to find something there and do not forget to follow the tips above.

Say for example, they give you a thousand bucks for your gold bracelet and their interest is 5% on or before the maturity date, which is a month from now. Today's March 22. So if you want to get your bracelet back, you have until April 22 to buy it for the thousand bucks you borrowed plus the 5%, a total of $1050. OR you could just pay back the interest of $50 and extend your loan for another month, which is the wise thing to do if you can't make the full payment just yet. Otherwise you incur penalties and/or additional interest the next time you pay since you missed the maturity date plus now you're on month #1, another 5%. Now, the redemption period varies from one pawn shop to another, where I'm from, it's 3 months after maturity date. So you have until July 22 to buy it back before it gets sold to someone else. (Confused? I'm pretty overwhelmed myself. Lol.) Let me break it down for you.

Loan Date: When your loan was granted

Maturity Date: When you have to pay the principal loan plus interest if you want to redeem your item or just pay the interest, to extend your loan another month.

Grace Period: aka Redemption Period; Starts the month after your maturity date, depends on the pawn shop, for some it may be 3 months, some 4 months.

Expiry date: END of Redemption Period, LAST day to EVER get your item back (I don't know what happens beyond this. I don't want to know.)

Principal loan: How much they'll lend you, depending on your item.

Interest: What the pawn shop charges for your loan. Varies from pawnshop. In the US, some charge 5%, others 10%. You should check their interest rates before you make your final decision.

Net proceeds: Some pawn shops charge advanced interest, which is deducated from your granted loan. So if they grant you $1000, they'll only give you $950. When you pay them back on the maturity date, you'll be paying the net proceed plus interest, basically the worth of your whole loan. So you're paying $1000, instead of $1050.

EXAMPLE:
Loan Granted: $1000
Date Granted: 22 March 2011
Maturity Date: 22 April 2011
Month # 1:      22 May 2011
Month # 2:      22 June 2011
Expiry date:     22 July 2011
Interest: 5% or 0.05 of Loan = $50

Situation 1: You have enough money to get back your item by maturity date. That's great. Just pay the loan plus interest, take your item and you're good to go.

COMPUTATION:   $1000+(5% x $1000)=$1050

Situation 2: You don't have enough money to pay for the loan yet, but you can pay for the interest by maturity date. That's ok as well. Pay your interest to renew your loan.

COMPUTATION:   5% X $1000 = $50

Situation 3: You missed your maturity date, but you now have money to pay for the missed maturity date and this month. Penalties/Surcharges apply. For this example we use additional 2% for the missed payment.

COMPUTATION:   Missed payment + Current payment
[(5%+2%) X $1000]+(5% X $1000) = $70+$50 = $120

If you missed two payments, maturity date and month #1:

COMPUTATION:   Missed payment x2 + Current payment
[(5%+2%) X $1000]x2 +(5% X $1000) = ($70x2)+$50 = $140+$50 = $190

If you want to make the full payment, add the principal loan plus any missed payments and the current interest payment. You get the gist. I know this post is starting to look like a math book already. Lol. After hours of slaving over this post and I'm finally content with how this turned out. This is for anyone who has been in my situation before, partly clueless about pawn loans. If you have any suggestions or insight that can help, please feel free to post below. Thanks for reading!