Customers provide collateral, eliminating the need to distinguish high risk from low risk borrowers. Typically, loans are small but can reach as high as several thousand dollars depending on the value of the collateral. Contracts vary from state to state, but the average loan period is 90 days. Interest rates will vary with the amount of the loan. The process is much the same as any other lending institution, with the primary difference being the size of the loan, the collateral and the holding of the merchandise until the interest or the loan has been repaid.
Pawnshops offer the consumer a quick, convenient and confidential way to borrow money.
A customer receives a percentage of the value the broker believes the collateral would bring in a sale. Although the loan to collateral ratio varies over time and across pawnshops, a loan of about 50 percent of the resale value of the collateral is typical. Most states regulate pawnshop interest rates and other charges, such as storage or insurance fees. If a customer defaults, the collateral becomes the property of the pawnshop after the loan is overdue by a specific amount of time, generally one to three months. Most states require the broker to notify by mail the owner of the pledge that he or she will lose the right to his property unless he or she redeems it within the stipulated grace period.