If your child watches TV, the odds are pretty good that he’s seen at least one commercial for a pawn shop. In fact, because of how these businesses market themselves, he might even be more curious about them than other financial institutions he’s more likely to use long term, such as a bank. Going over how these companies work can help your child use them wisely in the future.
How a Basic Transaction Works
In a simple pawn shop transaction, your child brings in something of value, such as jewelry or an electronic item. The pawnbroker then tries to determine what the item is worth. He offers a loan based on the estimate. If your child takes the loan, the broker keeps the item as collateral for a set period. If your child pays off the loan plus interest at that time, then he can get his collateral back. If he doesn’t pay it, he usually either starts a new contract that extends the old agreement, sometimes at a higher rate of interest, or he forfeits the collateral and the pawnbroker can keep and sell it.
Quick Loans, But Not So Fast
Pawn brokers are important in finance because they allow people to get loans that, although necessary, are too small for a bank or similar lender to worry about. For example, they can get your child the extra $100 he needs to pay his mechanic or cover the cost of an extra college credit. Pawn brokers also don’t check your credit, so for someone just getting out on their own, a pawn loan can seem like a great option. Kids need to be careful about approaching these shops for a few reasons, however.
In the past, pawn shops used to be shady institutions where stolen merchandise routinely changed hands. Although there are regions where this is still the case, in the United States, changes in regulations have brought pawn shops into the light. They operate under strict codes, working in conjunction with local law enforcement to spot instances of theft or other criminal activity. These regulations mean that reputable dealers no longer will work with kids—you have to be of legal age to pawn and have a state-issued ID, as the loan agreement is a legal contract.
Even when your child reaches legal age, pawn shops still can be tough to work with because they have quite a few fees on top of the interest, such as a ticket writing fee (you must return the ticket to the broker to get your collateral back). Many first-time pawn shop users aren’t aware of how these extra charges add up. Added to this is the issue of the poor value of the loan compared to the value of the collateral. In most cases, pawn brokers aren’t going to offer more than 50% of what the item brought in is worth. The risk of loss to your child is high.
Recommendations and Tips from the Pros
Pawning is a relatively simple process, but because of the interest and fees involved, it’s generally not a good idea for young people to get in the habit of it. Most professionals in the industry consider it to be a last resort option. They recommend teaching kids to look for other options first, such as approaching relatives or friends or selling items outright to get their true value. If your child is going to pawn, he shouldn’t pawn something that has sentimental value. Most people are able to reclaim their items, but there’s still the chance your child could default and lose the collateral. Another tip most kids aren’t aware of is that brokers will deal. If your child can show what the collateral is worth with good documentation, similar to what he’d do for a loan at a bank or other lender, he might be able to talk the dealer into offering a bigger loan. In fact, many pawnbrokers purposely start out with low offers, expecting the negotiation to bring up the final amount.
Pawn shops offer young people a viable way to get small loans without a credit check. Used properly, they can work well to keep your child out of financial problems when going to a bank or similar institution isn’t an option. Still, your child should know the risks involved, such as the loss of collateral and the way that fees quickly can hike up the cost of the loan. Most experts recommend teaching kids to see pawning as a last resort option.