The quick way out

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.