Why More People Turn to Pawn Shops to get by During Inflation
Inflation is a common topic on the news, and you may be feeling its effects of it already. Gas prices and food costs are up, and money is tight for many people. Often, during these periods of high inflation, people turn to pawn shops to help them get by. If you’re wondering why pawn shops are popular during times of inflation, why people sell to pawn shops, as well as considering if they’re the right option for you, keep reading. We’ll explain everything you need to know about pawn shops and their relationship with inflation.
What is Inflation?
While you probably have heard the term inflation thrown around, you may not know what it actually means. Well, in basic terms, a rise in inflation means that things are going to cost more. But while inflation directly refers to an increase in the price of goods and services, it has indirect consequences as well. Namely, purchasing power is going to decrease during periods of inflation. This means that the value of a $1 bill is going to decline because, with inflation, you simply can’t buy as much with it as you used to be able to.
What is a Pawn Shop?
A pawn shop is a special kind of store. You can purchase many types of used items from a pawn shop, such as jewelry, collectibles, electronics, musical equipment, and instruments, etc. You can also sell your things to a pawn shop to make some money quickly. However, the thing that makes pawn shops unique is that they are also a place where you can receive a short-term loan.
How Do Pawn Shop Loans Work?
If you’re interested in borrowing money from a pawnbroker, you will leave a valuable item that you own in their possession, as collateral. As long as you pay back the loan, plus interest, within the time period that is set, you will get your stuff back. However, if you are unable to pay it back in time, the pawnbroker will sell the item to recoup the cost of your loan.
How Much Money Can You Borrow From a Pawn Shop?
The amount of money that you are able to borrow from a pawn shop is going to depend on the shop you visit and the item that you pawn. In general, pawn shops will only offer a loan amount that is below 40% of the value of the item, with many rates hovering at around 33%. Therefore, the more valuable an item, the more money you can borrow.
How Much Profit Do Pawn Shops Try to Make?
Pawn shops are able to make money in two main ways:
● By Selling Items
● By Charging Interest on Loans
Pawn shops are structured so that whether or not someone comes back to repay
their loan, the pawnbroker will always profit. If the borrower does not return, the pawn shop can resell the item for more than the loan amount, since loans are only offered at approximately 33% of the value. So even if the item does not sell at full value, there is still a large margin for potential profit.
Furthermore, pawn shops only offer loans with interest. Plus, the interest on pawn loans is typically much higher than on bank loans, because pawn shops use collateral instead of researching a borrower’s financial background. This means, that if the loan is repaid, the pawn shop still makes a fair amount of money back on the transaction.
The amount of interest that is charged on a pawn shop loan will vary state-to-state since there are regulations in place to prevent predatory practices. However, interest rates typically range from 2-12% and must be repaid within 3 months at most. Furthermore, many pawn shops will charge additional costs for handling and holding onto pawned items, as well as other fees to boost their own profits.
Why Do People Turn to Pawn Shops When Inflation is High?
When inflation is high, money doesn’t go as far. Furthermore, it can take some time for wages to catch up, so many people will have to live as if they have had a reduction in income, without ever receiving an actual pay cut. This could mean that they can’t afford their typical lifestyle on the same salary, and if they already lived paycheck-to-paycheck, they may need a little extra help to get by.
Pawn shops can help people get money quickly. They offer immediate funds, without digging into credit history, which is great for people with poor credit scores. A pawn shop is a common resource to use when inflation is on the rise because it can offer a short-term small influx of cash. They are especially ideal options if an unexpected cost arises, like medical bills or home repairs. However, sometimes when prices spike due to inflation, people will pawn items just to buy the gas that is necessary to get them to work.
Plus, they offer they don’t care about credit score or a borrower’s current financial standing, since they are based on an item that is used as collateral. This means they’re a useful
Pros and Cons of Using Pawn Shops
Some of the benefits of selling to pawn shops or borrowing money from them include:
Pros
● They Don’t Perform Credit Checks
If you have poor credit, a pawn shop will still give you money, as their loans
are based on collateral.
● They Offer Cash Quickly
Whether you sell or borrow, you can get your money right away with a pawn
shop. This means you can pay for unexpected bills and costs right away.
● Their Interest Rates Can Be Competitive
Pawn shops often offer better terms than a payday loan, which can have an APR
of as much as 300%.
However, there are some negatives to keep in mind when dealing with pawn shops as
well. These are:
Cons
● You May Lose Your Valuables
If you’re putting an item up as collateral, you have to make peace with the fact
that you may never see it again. Pawn shops charge high-interest rates over short repayment periods, so if you’re already struggling financially, it can sometimes be difficult to pay them back in time. If you aren’t able to pay them, they will sell your item to recoup their costs.
● Their Interest Rates Are High
Their interest rates may be lower than payday loans and some other alternatives,
but they are still fairly high. Pawn shops are only able to offer loans because of the money they make from interest, so they charge as much as is feasible and allowed. This amount is also often more than can be repaid quickly, which is why many people just never come back for their items.
●You Can’t Take Out Very Much Money
Pawn shops only offer loans that are a minor portion of a pawned item’s value.
Most of the time their loan amounts are approximately ⅓ what an item is
worth. The only way to borrow more money is to then pawn more items but be prepared for the chance that you won’t be able to get these items back if you can’t pay the interest rates.
Are Pawn Shops Worth it?
Whether or not selling or pawning an item at a pawn shop is worth it will depend on the person. Since there are both pros and cons to using pawn shops, the specific needs and circumstances of an individual case will affect the answer.
However, for most people selling at a pawn shop isn’t worth it because pawn shops will only buy for much less than they are valued at. This is so that they can still make a profit when they resell them. If you’re able to wait and try to sell an item on an online marketplace or to a buyer directly, it can net you more money and be worth it in the long run.
However, if you need cash immediately, this may not be an option as it can take a while for you to find someone and then receive funds. Therefore, in situations where time is of the essence, pawn shops might be the best option.
As for borrowing money from pawn shops, there are often better alternatives. However, if you have a low credit score they might be the best option. This is especially true if you need money quickly and are confident that you will be able to pay back the loan plus interest.
No matter your circumstances, it’s important to evaluate all potential options before deciding to proceed with any specific course of action. Pawn shops are neither always a good option nor always a bad option, so you’ll need to decide if they are the best fit for your needs.