In addition to personal loans, Pawnshops offer auxiliary services such as money transfers and cellphone activation. In a standard business model for a pawn shop, interest earned on loans and revenue generated from retail sales is the primary sources of income. The average profit margin of a pawnshop is about 15% to 25%.
3 Ways Pawnshops Make Money
1. Personal Loans
A pawnshop’s primary source of revenue is the interest earned on the loans it makes to customers. As collateral for a loan, pawnshops lend money to individuals who pledge an item, such as a television or computer, as collateral.
The amount that a pawn shop is willing to lend is largely determined by the value of the item, but can also be significantly affected by the shop’s current inventory.
The pawnshop will typically offer to lend considerably less money if it has a lot of inventory of similar televisions in its inventory, for example, than it would if it had few televisions in its inventory.
The interest rates applied to personal loans by Pawnshops are significantly higher than those charged by banks. Many individuals who seek loans from pawnshops do not qualify for traditional bank loans, so the risk of default is much higher.
Pawnshops generally charge interest rates ranging from 5% to 25%. A pawnshop’s interest rate is governed by state law, and regulations differ widely from one state to the next.
Monthly or 30-day loans are generally made. As of the end of the month, either the borrower pays back the loan in full plus the interest charge or simply pays the monthly interest charge, which allows the person to extend the loan for another month.
As long as interest is paid, most Pawnshops will extend loans indefinitely, as they may collect more in interest than the amount of the loan while still holding the collateral against default.
The amount a person can borrow against an item is typically limited to 25% to 50% of what the item’s projected resale value is.
Pawnshop owners typically incur costs for storage, cleaning, repair, advertising, and general overhead.
Pawnshops also earn income from retail sales. This includes items that have been bought outright by the pawnshop from individuals and items that customers pledged as collateral of their loans and then defaulted on, forfeiting to the pawnshop the pledged collateral property.
In most cases, pawnshops offer a bit more money when they buy items outright than when they offer to lend against the items-perhaps 10% to 15% more-because they know they will be able to resell the items immediately and they can project better their profit margins.
As a result of loan defaults, the shop may ultimately acquire items that offer higher or lower profits depending on the items and the length of time the loans were carried before default.
By collecting the interest payments made before a loan defaulted, a pawnshop may have already earned a profit, even if it was not yet defaulted on. In addition to the length of time, the item may have depreciated in value to the point where it has no or little resale value.
3. Auxiliary Services
Some pawnshops charge fees for auxiliary services they provide in order to supplement their income. Pawnshops typically offer to check cashing services, cell phone activation, Western Union transfers, and bill payment services. In some cases, pawnshops also act as shipping locations for FedEx and UPS.