You got it perfectly right - a double edged sword that is both a boon and a bane to the borrowers. But come to think of it, the burden of fault is always on the borrower since they are not forced to borrow money. However, there are instances that borrowers are tempted to borrow more than they can pay and that's when the problem comes in. Considering that the loan has a collateral that can be forfeited in favor of the pawnshop, the borrower is at the losing end.
Risk or no risk, people can't defend some of the more unscrupulous ones that will take in your TV worth $300, give you $100 for it, but charge your $300 to get it back. And that isn't uncommon...
That's pretty much as I see it too, as long as we have capital to invest and we choose a good location, it's a really good business to be in.
While as a business I don't think there's any doubt as to if it's a good business to be in or not, as pawn shops have been around for years and are quite clearly well used. I'm still struggling with the fact that if I opened one, I'd be making money at the expense of others. People rarely use pawn shops unless they have to I would have thought, and it doesn't sit comfortably with me that while some poor soul is having to sell their grandmothers watch to be able to provide food, I'm sat there willing to make a profit from its sale, knowing that person in question will have no chance of getting it back.
Payday lenders do take on higher risks than other lenders - they don't check credit, and have very minimal borrowing requirements. The people they lend to as a whole are very high risk borrowers (and often among the dregs of society) who I know from experience will often do whatever they can to get out of paying back the loan in many cases. And pawn brokers are also a high-risk business. The items they take as collateral may not always be worth anything, and they may at least occasionally lend a substantial amount of money for something that is worth nowhere near what they thought it was. And even if they are able to lend a small % of what the items are actually worth, they can end up being stuck with a large inventory of things that many/most borrowers did not come back for, and that they are having a hard time selling for whatever reason. At the end of the day, an item is only worth what a buyer is willing to pay you for it if you need cash today to keep the lights on. Definitely a risky business with a high-risk clientele on the lending side.
Yep, that is why it's well paid because there are a lot of risks involved. Many times you don't know who is entering in the store and if it's stolen property or not.
A reputable pawn shop wouldn't entertain selling stolen goods and tgere us a lot of legislation now in place to be able to stop that from happening. While I agree there's are risks involved, I'm not sure if what they charge in interest justifies the amount of risk they take though.
This is exactly why most of the pawn shops in my area/country only accept jewelry, preferably gold. It's way easier to steal a phone and then pawn it than to steal gold or other type of jewelry. Considering that they pay a pretty small amount compared to the real price of gold, it's not really a loss if their clients don't pay them back.
There is always at least a little liquidity risk with any brick & mortar business. When you factor in any debt incurred in starting or continuing the operations of the business, and dealing with a high-risk clientele for at least part of the business, it can certainly be a risky proposition.
That is why they tend to have bigger margins, they need to make it worth it or else it would simply not be worth to take such risks.
