Are pawnshops profitable?

Are pawnshops profitable?

You have probably passed one every day on your way to work or driving home from the gym and never really noticed it, the local pawn shop. It's a great place to find a bunch of things you need and even some things you don't. As the economy declines, consumers require access to quick financial solutions.

The perfect climate for a pawnshop. In South Africa, there are over 15 000 pawnshops across the country. Millions of people rely on them to buy and sell unwanted goods and to make ends meet.

The pawnshop industry has traditionally been surrounded by a lot of stigmas and considered shady businesses riddled with stolen items, however, pawn shops are actually a much better option for people than fly-by-night pay-day loan shops and dodgy loan sharks. Pawnshops are well regulated and the owners work closely with the police
to ensure nothing brought in is stolen goods. Pawnbrokers make their money through the short-term, collateral-based loans they offer or through buying and selling used items. But, is owning a pawnshop a profitable business?

In South Africa, the National Credit Act (NCA) regulated pawn shops and it is a requirement to have an NCA license. This legislation stipulates that pawnbrokers who have more than 100 agreements on their books with a total outstanding debt owed to them of R500 000 or more must register with the NCR. This ensures all pawnshops are regulated, legitimate businesses. Failure to register will lead to a fine of R100
000 or 10 years of imprisonment.

The profitability of a pawnshop lies in the interest earned on the short-term loans as well as through the profit earned when selling items. The business model of a pawnshop works on the premise of a high-risk product. As the risk of a loan is relatively high, the pawnbroker will charge the customer a higher interest rate than what is offered by a traditional bank.

Profitable pawn shops aim to generate overall net profit margins of between 15 to 25%.
Let's take a look at each element of a pawn shop business and where the profitability lies.

Short-term collateral-based loans

The first revenue stream for a pawnshop is income generated from personal loans and the interest earned on the loan. A pawn shop will offer a loan to a customer who turns over ownership of a valuable item, such as a piece of jewelry. This serves as collateral for the loan.

The loan amount is based on the value of the item but can also be affected by the pawnbroker's current inventory levels on similar items. Pawnshops grant loans with substantially higher interest rates than what banks offer. As many individuals who go to pawnshops for loans can not qualify for traditional bank loans, the risk of the loan
is much higher.

There is no guarantee that the customer will pay back the loan. Interest rates offered by
pawnshops vary from shop to shop but generally range between 5 and 25%. The interest amount charged is regulated by the government.

Pawnshops generally lend no more than 25 to 50% of the projected resale value of the item being put down as collateral.

Short-term collateral-based loans are offered on a 30-day basis. By the end of the term, the customer must return to pay the loan in full plus interest and will then get their item back. Alternatively, the customer will pay the interest on the loan and be able to extend the loan for another 30 days. If a customer fails to repay the loan with the respective interest, the pawnshop is then entitled to sell the item that was put up as collateral.

On average, 70 to 80% of all loans offered by pawnshops are paid in full in the respective time frame. You will more than likely find that pawn shops are used by repeat customers who are looking to get cash fast. Customers often borrow against the same item again and again.

This is sometimes a better outcome than selling the item outright which could take weeks.

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Reselling

Pawnshops also make decent profits on items brought in to sell. The second source of income for a pawnshop is through retail sales. This includes items that were
purchased outright from individuals as well as items that were used as collateral on loans but whose owners have subsequently defaulted on their loan repayments, therefore, giving the pawnshop ownership of the item.

When an item is brought in to a pawnshop for an outright purchase, the pawnbroker will offer a bit more for the item, sometimes between 10 to 15% more than if the item was used as collateral for a loan. The reason for this is because the pawnshop owner will have the item available for immediate resale and will be able to accurately project profit margins on reselling the item. In instances where a loan has been maintained for a lengthy period of time, the pawnshop would have already made a profit on the loan just by collecting the interest.

However, as time has passed the item offered up as collateral could have depreciated in value to a point where it has no resale value. Provided you have the desired start-up capital, sound business acumen, and a strong management team, a pawnshop has great potential in becoming a highly profitable business.

Do you need a cash loan fast?

Bring your valuables to Capital Pawn and we will evaluate it and provide you with a quote for a short term loan within 15 minutes.

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