If you’re a small business owner, you know the importance of a revolving line of credit to help pay bills, order inventory, and even pay employees on time.
There are several credit options available for small businesses, including a traditional business line of credit, a small business credit card, and surprisingly, a “revolving” pawn loan, which in this tight credit environment, has become an increasingly popular option.
Here’s a Q&A on how pawn loans work, so you can consider if one is right for you and/or your small business.
What is the main benefit of a pawn loan?
A pawn loan is a quick and easy alternative to selling a valued piece of jewelry. You also don’t have to qualify for the loan or go through a credit check like you would with a traditional bank loan. The amount you receive is based on the appraised value of your piece — not your credit rating or other variable. It’s common knowledge that banks have tightened their lending standards over the last few years, so for many, a pawn loan is a viable option to a traditional loan.
How does a pawn loan work?
While terms and conditions between pawn shops may vary, a pawn loan generally works the same way: When you bring in a piece of jewelry or other item to the pawn shop, the property is appraised by a professional appraiser. The appraiser then gives you a price for your item, the interest rate on the loan and other terms and conditions of the loan.
In the case of coins and jewelry, the value is based on standardized industry factors, such as karat weight, rarity and condition. The pawnbroker will then offer a fixed-rate loan based on the agreed upon value, for a period of time.
If you agree to the price and terms of the loan, you’ll receive cash in that amount. The item then becomes collateral against the loan. You’ll receive a pawn ticket with your name and address, a description of the pawned item, the loan amount and the maturity date. The local police will also get a copy of the receipt. Pawn shops vary, but most pawn loans are for a period of two or three months, along with a grace period. Once the loan, plus any interest, is paid back, you’ll receive your item back.
What about if I need an extension on the loan?
Many pawn shops offer extensions and/or renewal periods. With an extension, you may extend the length of your loan, as allowed by state law. Most pawn shops will require you to pay a portion of the interest owed.
Another option is a loan renewal. You pay the accrued interest on the loan, and a new loan is written. The original (principal) amount of the loan and the interest rate stay the same, but the due date of the loan is reset for the full loan term.
If you don’t repay the loan within the time set forth in the terms, and you don’t apply for a loan extension or renewal, the collateral then becomes the property of the pawn shop.
Be sure to do some research before taking part in a pawn loan
Like the old TV commercial said, “an educated consumer is our best customer.” Like any business, the reputations of pawn shops differ. Some are more professional and offer better loan prices than others.
Go online and find out as much as you can about the pawn shop or jewelry store you’re interested in. Is the shop reputable? Can you talk to or read testimonials from satisfied customers? Make sure the place is licensed and regulated by the state and/or local authorities. Also make sure the shop is insured and has a secure place where your item will be locked up and kept safe.
It’s also best to work with an appraiser and shop that’s associated with the National Pawnbrokers Association. Also, understand how the appraiser determined the appraisal value, and the terms and conditions of the loan.
Keep in mind, the highest loan price doesn’t always make the best deal. Do your research before buying, selling or entering into any agreement with a pawn shop. An informed customer is a happy customer.