How Do Pawn Shops Work?

If you need money quickly and have something of value to use as collateral, a pawn shop can meet your financial needs. Pawn shops offer short-term loans using the borrower's provided personal possession as collateral. The loans are based on the value of the item. At the end of the loan period, the customer repays the amount borrowed and any interest, and reclaims the item.

Pawn Shop Basics

According to the National Pawnbrokers Association, the core of a pawn shop's business is making collateral loans. Loan periods vary based on state and local laws, but 30 days is typical. When you pawn the item, you'll get a ticket with details of the object and the transaction terms. You'll need to hang onto that ticket to reclaim the item. The pawn shop has to secure the collateral, and can't sell it as long as the loan is outstanding. The shops can sell unclaimed items. You can also sell items to the pawn shop if you prefer. Shops are regulated on the federal, state and local level, and fees and interest rates vary based on location

Determining the Loan Amount

The shop bases the loan amount on how much it thinks the item is worth and how much it can sell it for. Jewelry, electronics in working order with all necessary accessories, musical instruments, and brand-name tools are among the most common items that go through pawn shops. Jewelry prices are based on the value of the metal and gems, so you'll get much more for 24-carat gold than 14-carat. Everything else is based on the item's condition.


Unlike a conventional loan application, a pawn shop loan doesn't factor in your credit history. There's no credit check, and while a customer will have to validate herself and certify she owns the item, no financial information is required. The shops also don't file reports to credit bureaus if you fail to pay them back; they just keep the item. Robbie Whitten, the owner of Money Mizer Pawn and Jewelry in Columbus, Georgia, notes that being a repeat customer may cause that shop to increase the offer for future loans.


You won't get equal value for your item. The loan is likely to be around one-third of what the shop expects it to sell for according to Mike Criscio, owner of M&M Pawnshop of New Haven, Connecticut. If you can't pay back your loan as scheduled, there's usually a grace period of around 30 days for you to catch up. You also can extend the loan by paying the interest, but new interest will accrue on the loan during the extension period. If you default, the item belongs to the shop. If you can't pay the balance and the interest by the deadline, you'll have given the item up for far less than it is worth.