Pawn shops are a great place to sell items or use more expensive items as collateral for small loans when in a pinch. In addition, there are some methods that pawn shops utilize to make a profit. But how exactly does the pawn shop industry make money on reselling used items and loans?
Pawn shops make money in two primary ways and a secondary way: Reselling pre-owned items sold to them (pawned), collecting interest on small loans and offering small auxiliary services.
Pawning or Reselling
Pawned items are usually high-value common items that are resold at a higher price tag than which they were purchased. But sometimes the price increase is not significantly high, and other times it’s a vast increase depending on the demand, quality, and brand of the items.
Typically Pawned Items:
- Jewelry- Watches, engagement or wedding rings, sterling silver, pure gold, etc.
- Electronics- TV’s, Dvd Players, Gaming Systems, etc.
- Musical Equipment- Guitars, Amplifiers, Recording devices, etc.
- Collectibles- Signed Sports items, Vintage items, Signed items from famous individuals (like Actors/Actresses, singers..), etc.
Electronics that are newer or at least 2 years old can be resold for close to their new msrp as long as they are still in like-new conditions. Some electronics that are older but in like-new condition can be resold if there is a market for them.
Vintage items can be auctioned off online for a significant profit as long as the items are in great condition and high-demand. Like Vintage Gaming systems and games in nearly perfect condition and functional will be highly sought-after by collectors.
Many pawn shops offer small auxiliary services, such as cell phone activations, money transfers, check cashing, and bill paying services. These services have an attached fee to them, allowing the shop to make a small profit for providing such services.
Depending on location, some will even act as shipping locations for other companies such as FedEx and UPS.
Pawn shops offer small loans with items of equal or greater value as collateral should the loanee default. While the loans they offer are smaller than you would be able to get at a bank, the interest rates are significantly higher than a bank as well and are much more short-term.
If a loanee defaults, or fails to pay, then the item set as collateral is forfeited by the loanee to the pawn shop and then sold by the shop to recoup the money from the loan. The interest rate pawn shops charge on their loans is how they bring in revenue with loans.
Both retail sales and interest from loans bring in a profit for pawn shops, but it’s not going to be a vast amount right away or seen within a month. Pawn shops usually see an annual profit margin over a monthly or quarterly report due to their services.
Retail is the primary source of income for pawn shops, with the turnaround on items typically being relatively fast with minimal market value reductions due to the turnaround on items. An item they purchased the day before can be cleaned, tested, repaired, and put on the sales floor within 24-hours and be sold within minutes, hours, or even days depending on what the item is, condition, and demand for it is.
Loans bring in profit over time in the form of interest rates. Typically, the interest amount is paid within a short period, or most of the interest is paid within a small time frame. They continue to collect interest for as long as the loan is open.
Retail sales are a Pawn Shop’s main source of profit
Pawn shops will pay slightly more to purchase items directly versus use them as collateral for loans. A pawn shop cannot sell the collateral item if the loan is paid, or until the loan is defaulted on.
Loans take time, and in the time that it takes for the original debt to be paid the value of the collateral can quickly decrease and end up being worth less than it was originally appraised for. If the loanee only makes one or two payments, then defaults, and the collateral item decreases in value quickly, then the shop loses money on that transaction.
All in all, pawn shops make money through a number of services. If you’re thinking of starting a pawn shop business, it certainly helps to learn more about the various types of transactions typical for pawn shops and which services are the most profitable for them.