Pawn Shops Break Free from Stereotypes

Pawn shop loan neon sign
Pawn shops are viewed as more legitimate businesses than in the past, according to a new study by the Vanderbilt University Law School.

One of the study’s co-authors, associate professor of law at Vanderbilt University Law School Paige Marta Skiba, said pawn shops are “essentially…the more efficient Craig’s List.”

The study, in accordance with Marieke Bos of Stockholm University and Susan Carter of the United States Military Academy, found that pawn shops are now seen as viable businesses.

Pawn shops have been around for decades, providing people secured loans for their personal use. Secured loans are provided in exchange for personal property as collateral. The pawn broker and a borrower agree upon a price and a period of time for the item to be bought back with interest payments. If the borrower repays the broker back by the agreed upon date, the borrower gets to have their item again. If not, the broker is legally allowed to sell the borrower’s item for money.

Although pawn shops do charge a higher interest rate than some lending methods, they are significantly lower than payday loans. Pawn shops charge about 15 percent interest, whereas paydays loans can spike to over 500 percent.

One positive aspect of pawn shops is that unlike a majority of unsecured and secured loans, they are not linked to a borrower’s personal credit history. The pawn broker takes the collateral item and nothing else when the secured loan is given to a borrower.

“Pawn credit…has the unique—and, to many borrowers, desirable—quality of having no direct impact on one’s credit score and, therefore, no impact on one’s future access to credit,” stated the study.

The study said that 85 percent of pawn shop borrowers return to repay their secured loans.

“I think sentimentality and affection for objects plays a big role here,” Skiba said to Vanderbilt news. “My research has found that people are more likely to make good on their pawn contract when they’ve pawned something sentimental, like a wedding ring or class ring. So that can actually help borrowers from getting trapped into making a series of interest payments for weeks or months on end.”

When personal items are offered up as collateral for a secured loan, instead of risking less tangible items such as credit history, people are more inspired to repay their debts.

Vanderbilt's research states that about eight million households have used pawn shops—which accounts for around seven percent of all U.S. households—and those numbers are only increasing. Pawn shops have been growing three to four percent each year for the past two decades, with a significant increase of 20 percent starting in 2007.

But where is the surge coming from?

Some pawn shop owners attribute this growing acceptance to reality TV. Shows such as “Cajun Pawn Stars,” “Hardcore Pawn,” and the most popular “Pawn Stars” have caused a resurgence of interest in the business, according to the National Pawnbrokers Association (NPA). Pawn is currently a $10 billion business, attracting everyone from businessmen and collectors to struggling families and hobbyists. Reality shows helped destroy the negative stereotypes and sparked a new generation’s query about the industry.

“The pawnshop image has changed in the eyes of the American consumer, largely because of TV shows bringing viewers through a front door they might not have opened,” NPA spokesman Emmett Murphy said to the Denver Post.