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 in serious need of money.
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. Here are 7 things you should know about pawn shops.
How do Singaporean pawn shops work?
How do Singaporean pawn shops work?
When you pledge your item (usually something valuable like jewellery, diamonds, gold, electronics, watches or branded bags) to a pawn shop, the pawn shop will lend you cash in return. The amount is 60% to 80% of the market value for your pledge, which is decided by the pawn shop’s expert valuer. These type of loans are called collateral-based loans.
You have about 6 months to return the amount. Most pawn shops hold your pledge for the period of 6 months before auctioning it off if you do not repay your debt.
Every time you make a repayment, they will extend the time by another 6 months. The interest payable grows with each month. Past the one year mark, you’d probably be better off surrendering the pledge.
Here are 7 other things you need to know about pawn shops:
1. Pawn shops may be better if you are uncertain about repayment
Let’s say you’re not financially stable. 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 moneylender.
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, I hock my fancy watch for a bit of cash. After 6 months, things are still not looking up and I don’t make any repayment. The pawn shop then sells my watch at an auction, and that’s the end of my debt.
On the other hand, if I borrow cash from a licensed money lender, missing a few repayments can be disastrous. The interest rate compounds on the debt I owe, and after a period of months or years, the amount snowballs and I’m basically in deep… snow.
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.
Take heart though, a pawn shop’s interest rate is lower than the average credit card (which is about 2% per month).
3. Pawn shop interest rates are higher than personal loans
If you are in a serious need of money and have just read about this awesome thing called pawning, don’t start a hocking frenzy and turning over your precious family heirlooms.
Do note that banks are offering personal loans at 1% effective interest rate compared to the 1.5% that you can get at pawn shops.
But if personal loans are not a viable option for you due to bad credit rating, pawn shops may actually be better than moneylenders, which charge an exorbitant interest rate of close to 4% a month.
So the trick is you should only pawn items if your credit rating is bad and your financial situation in the near future is uncertain.
4. Avoid using pawn shops to liquidate assets
A pawn shop is meant to give out loans. It’s not a Carousell or 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). Usually the item is something valuable like a jade bangle or a Rolex.
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 moneylenders
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.
Shih Han, who once worked as an assistant in a pawn shop, says:
“Many of our customers were foreigners, like students or people on work visa. They could not qualify for credit cards, as I believe foreigners must have a higher income than locals to qualify.
For these people, I believe the pawn shop is very helpful. And personally I would like to say the system is more friendly than credit card loan.”
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, minus fees and 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. This is in accordance to the Pawnbroker’s Act.
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.
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).
Header image credit: jnzl via Flickr