By definition, a pawnbroker is a collateral loan broker—which means the broker extends loans purely on the value of a pawned item rather than a customer’s credit history. Because no credit check is required for this type of loan, it is simple and immediate—making it far more appealing than a bank loan, which can take weeks to process. Pawn loans rarely exceed a few hundred dollars, however, so this type loan is more suited to small cash emergencies rather than major financial commitments.

Typically, a person brings a pawnbroker something of value—a diamond ring, or an iPod, for example—because he needs a short-term loan. The pawnbroker loans the customer an amount of money based on the resale value of the “pawn” (the collateral item)—usually 30%-50% of the item’s actual value—and the customer signs a ticket agreeing to repay the loan, plus interest, within 30 days. At the end of 30 days, the customer can repay the loan and interest and reclaim the item, or he may pay interest fees incurred thus far and extend the loan for another 30 days. If a customer fails to repay the loan within the agreed-upon time, the pawnbroker is entitled to sell the pawn, after a waiting period specified by strict state and federal laws. (This is to give law enforcement agencies time to compare pawned property to burglary, robbery, and theft reports. Statistics indicate, however, that less than a tenth of one percent of goods passed through pawn shops are stolen.) Pawnbrokers occasionally purchase items outright, as well, from individuals and from auctions or estate sales. In all cases, items of value acquired are eventually sold—usually in a retail setting, and usually at a significant discount. This is why pawnshops are a popular stop for bargain hunters!

Pawnbrokering is one of the oldest businesses around. Established in China some three thousand years ago, this ancient tradition began to flourish in the 1400s when a group of Italian pawnbrokers were sanctioned by the pope to conduct “pledge borrowing”— giving interest-free loans to poor people offering collateral items of commensurate value. The concept was hugely successful, and gave birth to the pawn process as it’s practiced today, spreading first throughout Europe and then America, where, by 1914, pawn shops were the primary source of credit in the U.S.

While all American pawnshops today are privately owned (in Europe, state-sponsored pawn shops are still quite common), they are heavily regulated by state and federal law. Pawnshops must document and report every single transaction, and every customer served must provide valid identification.