Do you know that the legendary jazz musician, Louis Armstrong bought his first horn in a pawn shop? It was sold to him for 35 cents only. You can watch the video below to hear a story told by Louisâ€™ fan.
Due to the fact that musicians donâ€™t have a regular income, pawn shop provides a very useful service to help them get over short term financial stress. Although I doubt that you will find musical instrument deals in the pawn shops in Malaysia, pawn shops exist here for the same reasons it exist 3000 years ago in China.
As time goes by, pawnbroking is now strictly regulated by the authorities in some countries. Here, it is governed by the Pawnbrokers Act 1972 (amended 1st January 2004)
Pawner Vs. Pawnbrokers
Pawner is a person who gives a valuable item to the pawnbroker in exchange of monetary loan.
A pawnbroker (or pawnshop) is an individual or business that offers monetary loans in exchange for an item of value that is given by the pawner.
The valuable items having been pawned to the broker are known as pledges, or pawns, or in financial term – collateral.
Pawnbroker shall give the Pawner a pawn ticket and the loaned money. If the Pawner pays back the loan amount plus the agreed interest within the agreed period of time, the pledges shall be redeemed in original conditions.
How Pawnshop works?
There are two types of income a pawnbroker can make.
1. The interest charged on the loan amount
2. The profit made when a pawned item is sold
In fact, the pawnshops in Malaysia made money from both methods.
Common items pawned
- DVD movies,
- music CDs,
- Musical instruments
- Tools (both hand tools and power tools).
People turn to a pawn shop when
- They have difficulty gaining access to mainstream financial services due to poor credit rating
- They are desperate for an immediate financial aid to bridge the gap until their next pay day.
- They have used up their emergency funds and savings due to loss of jobs.
- They donâ€™t have proper income documents and credit history that enable them to get financing from banks. These are normally the low income group.
How long is the term of loan?
In Malaysia, 6 months.
How much is the interest charged?
In Malaysia, 2% per month (24% per annum). It is higher than credit card charges, but still lower than the loan sharks (normally more than 3% interest per month)
What happens if I canâ€™t afford to redeem the pawn?
When you canâ€™t pay back the loan plus the interest charges at the end of six months term, you can then renew then pawn for not less than 3 months. Of course you will need to pay more interest to redeem it later.
When the renewed term is over, the pawnbroker automatically owns the item which is less than RM200. If the value of the pledge is more than RM200, the pawnbroker will sell the pawn by auction. Any surplus from the auction bid shall be given back to the pawners.
Pros and Cons of Pawn
- Fast and easy loan
- Better rate compared to loan sharks
- There will be no bad credit history left on the book, as the pawnbroker can recoup their money because they have your valuable items pledged. They can sell the item to recoup the money.
You may lose the pawn tickets â€“
In this country, you will be given a pawn ticket whenever an item is pawned to the pawnshops. If you lose the tickets, other people can claim your item. If this ever happens, you should inform the pawnbroker immediately. You will be required to produce a police report in order to get a new ticket issued. If you fail to do so, other people who can produce the lost ticket will be able to redeem your items.
You may lose your belonging forever â€“
Pawnbrokers can keep the pledge when the expiry date of redemption is over if the sum involved is less than RM200. Even if the item is more than RM200 but you failed to redeem it, it will be sold in an auction. Some people lose sentimental items (think of grandfatherâ€™s clock, grand-grandmaâ€™s diamond ring) to pawnshops.
High interest rates â€“
2% per month
Pledges not described in details â€“
The pawnbroker should describe the pledges in details in the pawn ticket. But normally they only describe your Victorian era, antique oxide finish, 7mm in width 4kt gold wedding ring simply as â€œgolden ringâ€. You should take a picture of your item and ask the pawnbrokers to chop, sign and date it. This is to ensure that youâ€™ll get back your exact item during redemption.
You know that your item is worth RM1000, but the pawnbroker will under-evaluate it and provide maybe meagerly RM300 loan. It is pretty normal that your item being evaluated 50% below the actual value.
Where to find pawn shops?
Conventional pawn shop â€“ you will easily find pawn shop in almost every town and city. You can find the pawnbrokers listed in yellow pages and local directories too.
Alternatively, Bank Rakyat and Bank Islam in Malaysia provide similar service for pawning your jewelery. These Islamic financial institutions donâ€™t make profit from interest, but from the safe-keeping fees. You may get a better rate in banks compared to conventional pawn shop.
Frankly, Iâ€™ve never engage the service of a pawnshop. If you do, please share your experience with us in the comment section below.
The Money Book by Consumers Association Penang (CAP)