borro.com offers traditional way of getting money
without the hassle

Financial Adviser, 15 October 2009

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Pawnbroking has traditionally offered a way to get money without the bureaucratic hassle that comes with bank loans

As the effects of the recession continue, many are turning to pawnbroking as a means of raising some instant cash. But how does it work, and what relevance does it have in the 21st century?

Pawnbroking has existed in one form or another for hundreds of years but reached its peak in the 19th century.

It is a process by which people are allowed to borrow money for short periods of time secured against the property that they pledge. The number of pawnbroking outlets has increased over the past 20 to 30 years and the National Pawnbrokers Association now suggests there are now over 800 outlets in the UK and that this number is growing at 10 per cent rate a year.

Like a bank, a pawnbroker earns income on the interest charged on the loan, which is secured by a pledged item. The average interest charged by a pawnbroker is about 8 per cent to 10 per cent a month, although due to the emergence of online pawnbrokers, rates have dropped to 4 per cent to 6 per cent, depending on the size of the loan. High interest rates mean pawnbroking is not an appropriate option for a long-term loan but can be a beneficial and superior choice for those borrowing money for a short term.

In order to accept goods as a pledge, a pawnbroker makes an immediate valuation of the goods and subsequently offers a sum of money to be advanced. The customer is presented with a pre-contract information document detailing his rights and protection under the Consumer Credit Act 1974. The customer having decided to go ahead with the transaction then signs the official contract and agrees to the terms and conditions of the loan. They are also given a pawn-receipt for presentation when redeeming the goods.

The agreement is usually for a period of six months, which is also the minimum length and the customer is entitled to redeem property by payment of the original loan plus the monthly amount due at any time during the contract period. However the customer can redeem at any time they choose between the day they take out the contract and the end of the six months, and they only pay interest for the time they have the loan.

The majority of pawnbrokers prefer for all pledges to be redeemed at the end of the contract, however if a customer does not renew or repay the remainder of the loan plus the interest, the pawnbroker will take steps to dispose of the goods. The disposal of the pledge must be at true market value on the date of sale so as to ensure a fair price for the customer. Forfeited pledges will be taken to auction, with a reserve price. If the item is not sold, it will either be scrapped or sold in the shop. In all cases, where the proceeds of sale are greater than the amount owing to the pawnbroker, the balance is then given back to the customer.

Contrary to popular myth, only where the loan is for less than £75 and contract period six months does the pawnbroker gain title to the goods where the customer has not repaid the loan. Again, contrary to what people may believe, the pawnbroker does not wish to gain title to property as he is in the business of lending money and he wishes far more to see the loan repaid without needing to resort to the sale of property. This way, not only is the debt cleared in full but the customer is happy at the return of his goods and he has possession of them to return again at some stage in the future. This is proved by the very high volume of trade that is repeat transactions - nearly always with the same security and very often several times in a few months. Only where the loan was less than £75 does the pawnbroker gain title to the goods where the customer has not repaid the loan. The statistics show that 80 per cent of loans are redeemed or renewed and only 20 per cent are forfeited. However, with higher value loans, the statistics are typically nearer to 90 per cent of goods being redeemed.

Pawnbroking businesses on the high street typically loan against gold because it is easy to value and store, is a luxury ‘can do without item’ which generally does not depreciate and has an established second-hand market. Some more upmarket and online pawnbrokers issue loans against more high value items such as diamonds, watches, arts and antiques and luxury cars.

Pawnbroking began as a fragmented trade tucked away on backstreets but now bigger chains are bringing it to plum spots on Britain's high streets helping to erode the taboo attached to the industry.

However it is the rise of online pawnbrokers that are making the business more accessible, easier to use and more discreet, meaning people are less embarrassed to pawn their valuables as they can do it from the comfort of their own home. Online pawnbrokers offer a fully insured courier service to collect the items, which are then locked away in secure vaults, and all interest rates include all costs associated with couriers, valuation, storage and insurance.

If you were to walk into a pawnbroker's shop today you could be forgiven for thinking that you had just walked into your local bank or building society. Pawnbroking is now a serious alternative to using the services provided by the high street bank. Customers realise that borrowing money against goods they already own is an affordable alternative to a bank overdraft or other type of loan.

A pawnbroker will lend from as little as £5 to many thousands of pounds in one quick transaction that requires no credit checks or lengthy meetings or form-filling. Short-term cash flow is the reason most people use a pawnbroker, where convenience and speed of service are quite unrivalled. A loan will just as often be obtained for some extra spending money as it will be to clear an outstanding telephone bill. It is flexible, transparent, competitively priced and immediate and it is these factors and its payment terms, which are without early redemption penalties that customers prefer.

Pawnbrokers target a customer base which is precluded from accessing more traditional forms of finance, including mainstream banking and alternative lenders. As a result of the credit crunch environment pawnbroking is now being used by a greater proportion of the population and it is estimated the industry will double over the next 10 years. All major high street pawnbrokers and smaller local companies have reported a significant rise in profits since the beginning of the recession, as more and more people are finding alternative routes to get cash, meaning these figures will change considerably over the next few years.

Paul Aitken is founder and chief executive of borro.com.