If you urgently need money, but cannot get a loan from the bank and cannot overdraw your current account, the pawn loan from the pawnshop is often the last option. Provided that you have a valuable item that can be pledged, cash is immediately available without application and without annoying questions.
Image of pawnbrokers largely tainted
Although the image of the pawn shop is still partially negative, it is lucrative for pawnbrokers and customers. The pawn shops that are now available in all major cities are also booming in Germany. The actual business in the pawn shop is something of a barter. Customers exchange their valuables for cash by taking out a mortgage.
Customers of the pawnbrokers are not, as one might suspect, people from the marginalized social groups, because they usually have no valuables that can be pledged. Many customers come from the middle class. It is often the self-employed or freelancers who have to bridge liquidity problems or people who, for whatever reason, do not get a loan from the bank or do not want to apply for one.
How does a pawnshop work?
Virtually anything that is more or less valuable can be turned into money in the pawnshop. Popular pawns are gold, valuable jewelry such as chains, rings, bracelets and watches, but also antiques or high-quality porcelain, electronic items or designer clothing can be pawned. There are even special pawn shops for cars, boats or construction machinery.
In the Federal Pawnbroker Ordinance, the provisions under which the pawnbroker may take place are regulated by law. Nationwide, the pawnbroker lends his money at a fixed interest rate of 1 percent, at which additional fees of up to two percent per month may apply.
Amount of payment and term
The pledge loan will generally be between 25 and 50 percent of the value of the object to be pledged. The terms of pawn lending contracts are required by law to be at least three months. A deposit is issued for the deposit, which entitles the customer to redeem the object of value. To do this, the loan plus interest and fees must be repaid within the set period.
Extension and auction
If a debtor is not financially able to trigger the mortgage loan within the period, there is the option to have the mortgage loan extended. If the object of value cannot be triggered at all, it goes to the public auction. There are also regulations and deadlines for this. A pawn that has not been released may be put into auction by the pawnbroker at the earliest one month after the due date or at the latest six months afterwards.
If the auction achieves proceeds that are higher than the pawn loan plus interest and all applicable fees, the pawnbroker must pay the difference to the previous owner of the valuable item. If the object of value cannot be auctioned, the pawnbroker is entitled to sell it.
The advantages of mortgage loans
Whoever goes to the pawnbroker is not in debt. An adequate asset is deposited for the pledge. Interest and fees are payable for this service.
In the event of short-term financial shortages, the pawnshop is an ideal way to get cash quickly and, above all, unbureaucratically. The pawnbroker does not ask any questions, only the ID card has to be presented. As a pledgee, you are entitled to redeem the pledge within a certain period, which is clearly better than if valuable heirlooms had to be sold in the event of liquidity shortages.
Creditworthiness, income and Credit Bureau information are irrelevant. Anyone who has something to pawn can get a mortgage.
The disadvantages of mortgage loans
Mortgage loans have three major disadvantages that must be weighed against the advantages. Often less than 50 percent of the market value of the object of value is mortgaged. How much is paid depends on the pawn and the pawnbroker’s discretion. In addition, the mortgage loan is a very expensive loan compared to normal installment loans. A mortgage loan can total fees of up to 40 percent. If you borrow 1,000 USD, you may have to pay back 1,400 USD. The biggest disadvantage, however, is the time factor. You only have three months to redeem the deposit, each extension incurs additional costs.
It is good that there are pawn shops. It is also good to know that everything in the pawnshop is done according to legal rules. The pawnshop is an alternative for people who urgently need cash and who have valuables that they do not want to sell. Just like for people who don’t get a loan from the bank. However, the mortgage, which is not really a loan, is one of the most expensive ways to get liquidity.
Alternatives to the pawnshop
We show you other alternatives to borrow money outside of the usual banking business in our article Lending money without a bank.