To try this out, I went to Rick's Music & Pawn and asked, "How much will you loan me for my wedding ring?"
It's a nice wedding ring -- a standard gold ring with my wife's name and our wedding date engraved inside. Bought new in 1994, the ring cost about $140.
The answer was, "$10."
In return for pawning my wedding ring, I would receive $10 and a pawn ticket. The ticket would indicate the following:
- The item that I pawned
- The amount of money loaned to me for the item
- The amount of money due in 30 days to get the item back
My ticket would tell me that, for my wedding ring, I received $10 and that I need to pay $12.20 (that's 2 percent interest plus 20 percent in fees on my $10) in 30 days to get the ring back. Within 30 days, I have three options:
- I can return to the pawn shop and pay the full amount ($12.20 in this case) to retrieve my wedding ring.
- I can return to the pawn shop and pay the monthly fee ($2.20 in this case) to extend my loan for another 30 days. At this point, I'd have to enter into a new contract for the next 30 days. Here's where some pawnshops differ on the second-month contract: Some would make you pay 22 percent on the new principal, $12.20, (for a total of $14.88), while other pawnshops will allow you to continue paying 22 percent on the original principal.
- I can do nothing, in which case the pawnshop keeps my ring and sells it.
That, in a nutshell, is the basic pawnshop transaction. In a busy pawnshop, that sort of transaction happens hundreds of times every day. In many communities, the pawnshop is pretty much the only easy way to borrow small amounts of money. If you need $100 to make it through the week to your next paycheck, where are you going to get the money? A bank is not going to touch a small loan like that, and even if it did it would take a week or two to process the application. A pawnshop is a quick, easy way to get a loan.
Of course, $2.20 fees due in 30 days for a $10 loan is a pretty steep rate. That's 264 percent per year! Let's take a look at how a business can legally charge that type of interest.