Back in the ’80s, middle-class Singaporeans associated pawn shops with poverty. If you were seen walking into one, your acquaintances would never let you live it down; they immediately assumed you’re an alcoholic, glue-sniffing, 4D addict. But these days, pawn shops are becoming an accepted part of the loans scene (sigh) and recent reports show that they have been on the rise since 2008. At least know this about pawn shops then:
1. Pawn Shops May Be Better if You’re Uncertain About Repayment
Let’s say you have the financial stability of the average 7-11 robber. You’re not even sure you can make regular repayments, but you still need a loan. In that case, you’re better off using the pawn shop than a money lender.
When a pawn shop loans you money, your pledge (the item you’re hocking to get the loan) is the ultimate loss you can incur. For example:
Say I borrow cash from a licensed money lender. I then miss numerous repayments. Every time I miss a repayment, the interest rate compounds on the debt I owe. Over a period of months or years, I’ll end up owing several times the amount I borrowed.
Now let’s say I use a pawn shop. I hock my fancy watch for a bit of cash. After six months, I still can’t make any repayment. The pawn shop then sells my watch at an auction, and that’s the end of my debt. It’s not going to snowball any further.
2. Pawn Shops Charge Interest
When you hock something at a pawn shop, you cannot redeem it at the same price you got for it. There is interest on the repayments.
In most pawn shops, the interest rate on loans is 1% for the first month, and 1.5% for subsequent months. So the longer you take to redeem your pledge (i.e. pay back the loan), the more money you’ll end up paying.
A pawn shop’s interest rate is lower than the average credit card (which is about 2% per month).
3. You Have Six Months to Redeem Your Pledge
Most pawn shops will hold your pledge for six months, before auctioning it off. Every time you make a repayment, they will extend the time by another six months.
Of course, the interest payable also grows with each month (see point 2). Past the one year mark, it may be prudent to simply surrender the pledge than to keep paying.
4. Avoid Using Pawn Shops to Liquidate Assets
A pawn shop is meant to give out loans, not compete as an eBay alternative. When they accept a pledge, they will extend loans that are around 60% – 80% of the full value of the pledge (this amount can vary significantly, based on the valuer’s judgement).
Using a pawn shop to liquidate your assets is probably not the best idea. You will almost always get less than selling to a watch trader or goldsmith.
5. Pawn Shops are More Accepting than Banks or Money Lenders
As long as you can bring the pledge and proof of identity, most pawn shops are happy to extend a loan. They have fewer restrictions than banks, which will demand a minimum income, CPF documents, etc.
If you have a bad credit rating, or haven’t got a stable job (and why the hell are you taking a loan then?) you might want to try the pawn shop first. You should also follow us on Facebook, where we explain the intricacies of not going broke in Singapore.
6. Pawn Shops Give You the Surplus from Auctions
Let’s say you hock your fancy watch for $9,000. You make no repayments, and it gets auctioned off.
At said auction, a large crowd of people fancy the watch. Bidding gets fierce. In the end, the watch ends up selling for $11,000. What happens to the excess $2,000?
It goes back into your pocket, that’s what (minus any other fees like interest).
This also means that pawnbrokers aren’t inclined to rip you off with unfairly low valuations. If something is auctioned for more than they gave you, they still won’t pocket all of the profits.
7. Pawn Shops Can Be an Awesome Place to Buy Gold
When you want to sell gold, always visit the goldsmith first (see point 4). But if you want to buy gold, be sure to visit pawn shops as well as goldsmiths.
You may recall that, during the last gold flash crash, the pawn shops in Little India looked like McDonald’s outlets running a Hello Kitty promo. Those crowds weren’t there to pledge anything. They were there to buy gold from pawnbrokers.
Besides occasionally charging less, some pawn shops also don’t charge GST. They may be operating under the Gross Margin Scheme, in which GST is based on their total profits (as opposed to the price of their items). All things being equal, this can make pawn shops cheaper than goldsmiths.
The only drawback is that pawn shop gold is second-hand. You may not get it in the original packaging (can be annoying for collector’s edition coins, if you’re into that).
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Tags: Personal Loans