As your children get older, it’s natural that they'll be curious about money lending. Maybe they don’t have enough savings for that new games console, or they need a quick cash boost to fix their first car.
Pawning is readily available and, for young people, it can seem like an easy option to get their hands on some extra cash. But, before your kids start going down that route, it's important that they know how pawn shops work and can make responsible decisions about borrowing money. Let’s look at exactly what pawning involves and the pros and cons for your kids.
What is a pawn shop?
Pawn shops have been around for thousands of years and are one of the oldest forms of money lending. A pawn shop offers a short-term loan in exchange for a valuable item. If the customer repays the loan by the agreed deadline the item is returned. If not, the item is sold by the pawn shop to pay off the debt.
How to explain pawn shop transactions in simple terms that kids and teens will understand
It’s a good idea to talk to your kids and teens about pawn shops and how they work. This will make sure they understand what’s involved with a pawn loan and can help them to make smart decisions about whether to use them.
Explain that pawn shops lend money in exchange for a valuable item. The money offered will usually be a fraction of what the item is worth, and they’ll normally be charged interest and fees, too. If they fail to repay the loan they’ll lose the item, so they shouldn’t risk pawning something that has sentimental value.
Encourage your child to see pawning as a last resort, rather than something to make a habit of. If possible, they should look for ways to save or turn to relatives or friends for support first. Tools like our in-app Money Missions are great for teaching your child about financial responsibility and our financial education lessons encourage healthy saving habits and smart spending decisions. Most importantly, let your children know that you’re there if they want to talk about money worries.
How old do you have to be to pawn something?
You must be 18 to pawn an item. Pawning something is essentially a contract, where you borrow money that’s secured against an item you own. Because it’s a legal contract, your child needs to be at least 18 to take on that responsibility.
What can you pawn?
You must legally own the item you’re pawning, so your teen can’t just help themselves to your valuables and pawn them without your permission. Pawn shops will be happy to accept almost any item that has value, but commonly pawned items include:
- Precious metals like platinum, gold, and silver (normally jewelry)
- Gemstones, including diamonds, sapphires, emeralds, and rubies
- Designer or luxury items like watches and handbags
- Antiques, including ornaments and furniture
What happens if you can't repay pawn debt?
Pawning can seem like an attractive way to get a quick boost of cash, but your teen could lose out if they can’t make the repayment. If they fail to pay back the loan, the pawn shop will take ownership and sell the item to recoup their losses.
What are the pros of using a pawn shop?
Pawn shops sometimes get a bad reputation for offering poor-value loans to people who are in desperate need of money. But, for young people, it can provide a short-term solution and there are some pros to pawning:
- It doesn’t affect your child’s credit rating. There are no credit checks because the loan is secured against an item, so if your teen fails to repay the loan their item is simply taken as payment.
- There are strict regulations in place to stop pawn shops from taking unfair advantage.
- Interest rates and fees are likely to be higher than other types of personal loans, but rates tend to be much better than unplanned overdraft charges or cash advances.
What are the cons of using a pawn shop?
There are downsides to pawning that are worth being aware of:
- Pawn loans normally involve high-interest rates and fees and they can expect to pay around 4-6% interest per month (that’s $40-$60 per month for a $1,000 loan).
- If your teen doesn’t repay the loan within the agreed time, the pawn shop will sell the item, so there’s a risk your child could lose a valuable item.
- Pawn shops are known to start with a low offer and negotiate up, so if your child lacks enough confidence or negotiating skills, they could end up accepting a lower-value loan offer than they should.
- Your child only receives a fraction of what the item is worth.
What are alternatives to pawn shops?
Pawning can be an option for young people if they need a small, short-term loan without a credit check, but there are risks and it should be seen as a last resort.
Encourage healthy saving habits so that your child will be less reliant on borrowing. There are lots of ways to teach kids about money and a GoHenry prepaid kids debit card can help them learn to budget and manage their spending.
If your child does find themselves in a tight spot and in need of cash quickly, it’s always wise to ask friends and family for financial support first. Your child could make some extra money by selling items to friends or via online marketplaces, where they’re likely to get a better price. Or why not get them the GoHenry app and start teaching them about financial responsibility and saving as early as possible? It may help them avoid pawn shops completely.
Find out more about GoHenry today and see how it can help your children better manage their money.