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How Pawnshops Work: A Basic Guide for Pawnbroking in the Philippines

Introduction

Have you ever wondered why there are more pawnshops than banks in the Philippines?

This is attributable to the reality where pawnshops provide a wide range of financial services in places where banks are scarce. In fact, these outlets can become crowded and have long queues even in the provinces and especially in outlying areas.

Aside from the borrower incurring nominal transaction costs, the loans are simple to secure especially because it functions where in an item of worth that can be used as collateral is given in exchange of the loan.

Pawnshops, in contrast to their negative image in other countries, are favorably viewed by many Filipinos due to their critical position in fulfilling their short-term financial needs.

What is a Pawnshop?

A pawnshop is a store or form of business that lends money to consumers who carry valuable items to be pawned. These valuables are referred to as “collateral.” The precious asset will only be returned from the pawnbroker after the loaned money and interest have been repaid.

If the borrower fails to repay the pawnbroker’s loan and interest within the agreed-upon time frame, the pawnbroker can now sell the valued object to another buyer to recoup the money they loaned.

Pawnshops also provide micro-lending facilities, which are a critical source of credit in many developed countries, especially here in Asia. They further fill the void created by financial systems by offering loans to low-income families and minimum wage earners that might not have been available otherwise. They can also boost credit market competition by offering an alternate source of credit to those who have been denied bank loans.

Over time, pawnshops have developed into multi-purpose stores that offer a wide range of goods and services. They have also expanded into unrelated market practices such as money remittance, money changing, bill payment for collection services, e-load, and delivering facilities for the selling of microinsurance goods to households.

How Do Pawnshops Work?

People go to pawnshops for three reasons. First, they need cash in order to secure a swift loan. Second, they must pawn personal possessions such as jewelry, electronics, and other precious objects. Finally, they try to purchase unredeemed objects that are up for sale.

If you’ve never been to a pawnshop, don’t be intimidated because they have fantastic bargains. They’re similar to a garage sale and a flea market wrapped into one.

There are also three types of people who usually transact at pawnshops, including the following:

  1. People who need quick cash and are willing to pawn their precious item as collateral
  2. People who are trading their used items
  3. People who buy new or used merchandise

So, what’s the big thing with pawnshops? The fundamental concept of a pawnshop is to lend money to customers. The procedure is as follows:

  1. The act of pawning starts when you bring something you own and give it to the pawnbroker as a collateral for your loan.
  2. The pawnbroker lends you money in exchange for the collateral.
  3. You get your equity after you have repaid your loan and interest.
  4. If you fail to repay the loan, the pawnbroker will hold the collateral.

Suppose you’re pawning your recently purchased wedding ring, which the pawnbroker values at P2,000. You will get P2,000 and a pawn ticket in exchange for pawning your wedding ring. The following will be written on the ticket:

  1. You pawned something.
  2. The amount of money borrowed for the object
  3. The sum of money due in 30 days to reclaim the item

Your ticket will indicate that you got P2,000 for your wedding ring and that you would pay P2,200. This amount already includes the additional 10% interest on the loaned money. You will then have 30 days to get your ring back. During those 30 days, you can do any of the following:

  1. Return to the pawnshop and pay the full price to get your wedding ring back.
  2. Pay the recurring fee at the pawnshop to stretch your loan for another 30 days.
  3. Do nothing and let the pawnshop keep and sell your ring.

That is the fundamental pawnshop transaction. A traditional item pawned at a pawnshop has a high chance of being reclaimed by the individual who pawned it. If it is not reclaimed, the pawnbroker would have to sell the item to recover the loan. In this case, the object must be in good working condition in order to be resold.

When compared to a yard sale or a flea market booth, a pawnbroker cannot sell junk. This is done to maintain the pawnshop’s reputable name and company in the community.