Tough Times Series: Pawnshops Attract New Users in Down Economy
Monica Steinisch
Legend has it that Queen Isabella of Spain pawned her royal jewels to finance Christopher Columbus' voyage to the New World. While some question that claim, it's a fact that people in need of quick cash have been pawning their valuables for at least 3,000 years. And in all that time, the transaction has changed little.
What has changed recently is the pawnshop clientele. Compared with just a few years ago, today's pawnshop customers are more likely to be middle-class consumers who have maxed out their credit cards and are struggling to make ends meet before the next payday. According to the National Pawnbrokers Association (NPA), headquartered in Keller, Texas, 80% of pawn customers are employed and 33% are homeowners.
While pawnshops offer a quick solution when cash is short, their loans often come at a high price. Before you put your most valuable possessions on the line for gas or grocery money, understand how the pawn process works and what it could cost you.
How pawnshops operate
What takes place in a pawnshop is pretty straightforward: You bring in a possession of value�jewelry, musical instruments, electronics, computers, and tools are common, though pawnbrokers see everything from artwork to boats�and the pawnbroker lends you money against that collateral. According to the NPA, the average pawn loan is $75.
The amount of the loan is for a percentage of the estimated resale value of the collateral. That percentage can go higher or lower depending on such factors as state pawn loan regulations, the desirability of the item, and the likelihood that the borrower will reclaim the property.
Jerry Whitehead, founder and principal of the Pawnshop Consulting Group and a 35-year industry veteran, says that for regular customers with a history of repaying their loans, "I would be more likely to loan outside the box," and exceed 50%.
Eighty percent of pawn customers are employed and 33% are homeowners.
Before you leave the shop, the pawnbroker gives you a ticket with a description of what you pawned, the serial number, if there is one, and the amount of the loan. The ticket also will state the terms of the loan�how much you'll have to pay by what date, the interest rate you are being charged, and any fees you'll have to pay.
If you pay back the loan plus interest and fees by the due date, which usually is 30 days later, you get your collateral back. Another option would be to come back in a month, pay the interest you owe, and extend the loan for another 30 days. (Ask the shop how many times you can extend the loan before you must repay it.)
If you don't repay the loan, the pawnbroker keeps your collateral and sells it. Since pawnbrokers only lend a percentage of the collateral's value, they typically can sell the item for significantly more than the unpaid loan balance.
Pawnshops tout speed, ease
For those who can't tap a line of credit, a pawn loan may appear to be the only way to raise a small amount of cash quickly. Pawning requires no lengthy loan application and you don't have to wait for approval. The whole process can take just five to ten minutes�but in the end you could pay big time for this convenience.
Another selling point for pawn loans is that no one gets turned down based on a low credit score. In fact, there's no credit check at all. Because your collateral is more valuable than the loan, the pawnbroker is not concerned about how much of a credit risk you might be.
Today's pawnshop customer is more likely to be a middle-class consumer.
And, pawnbrokers point out, there are limited consequences if you do not repay the loan. The pawnbroker will not report you to the credit bureaus, your credit will not be damaged, and you will not face legal action. There will be no collection calls or mounting debt to worry about. The consumer's credit would only be affected by the information on his or her history with the respective pawnbroker. But, not paying a loan may mean the pawnbroker will not do business with you again.
Despite their allure during tough times, pawn loans still should be seen as a last resort.
Pawn loans typically expensive
According to the NPA, there were 6,900 pawnshops nationwide in 1988�there are 11,226 today. As the industry has gotten more competitive, interest rates have come down. Depending on the state, the rate on a pawn loan may be competitive with those that some credit cards charge. In other states, however, rates can reach triple digits when calculated on an annual basis.
What makes every pawn loan more expensive are additional fees tacked on to the interest charges. Fees for service, appraisal, storage, insurance, and handling can add significantly to your loan cost. And, since fees on a small loan sometimes can be the same as or proportionally higher than those on a large loan, a very small loan can actually carry a higher annual percentage rate (APR) than a larger loan. All together, interest charges and fees can bring the real cost of a pawn loan to well over 100%, or even 200%, APR.
Pawn loans should be a last resort.
Linda Sherry of Consumer Action, a national consumer advocacy and education organization in San Francisco, cautions consumers against all types of high-cost loans.
"The exorbitant finance charges on pawn loans and payday loans make these debts extremely difficult to repay," says Sherry. "There is a very real risk of getting locked in to a cycle of renewing the loan�and the finance charges�over and over again."
Like interest rates, individual states regulate fees, which can vary widely. To get information about pawnshop regulations specific to your state, contact your Secretary of State.
In addition to the financial cost of the loan, pawning can take an emotional and psychological toll on borrowers. It can be distressing and risky to put something on the line for a fraction of its actual worth�even more so if the item also holds sentimental value. Even if you fully intend to repay the loan and retrieve your property, there's no guarantee that you will be able to do so by the deadline. Statistics vary, but about 30% of pawned property is not redeemed. If you can't repay your loan, you may have just sold your engagement ring to the pawnbroker for $75, or your prized guitar for $25.
Alternatives to pawning
It can be tempting to take the seemingly quick and easy route to resolving your immediate money troubles. But before you pawn family treasures, be sure to exhaust all other options. Here are a few to consider:
If you're a member of a credit union, inquire about a short-term, quick-qualifier loan. In some cases, the interest rate is 0%.
If you're willing to give up your property permanently, sell it yourself�you'll get far more for it.
Try to avoid short-term solutions that will make your money problems worse.
Contact a credit counseling agency for free or low-cost one-on-one help with your budget and bills.
Borrow from a friend or family member, with interest. (That makes it worthwhile for the lender while you benefit by avoiding additional loan fees.)
Ask your employer for an advance.
Ask your creditors (utilities, credit card companies, and anyone you owe money) what it would cost you in interest or fees to postpone payment for a few days or weeks. If it's a manageable amount, you could use available cash to cover essential expenses like gas and groceries until the next payday.
What to know if you pawn
If you've determined that a pawn loan is your only option for raising needed cash, go into the transaction prepared. Here are some tips for maximizing the loan you can get on your valuables:
Deliver the item in the best possible condition. That means shining up your saxophone, dusting off the stereo, and including the remote control with the TV.
Have some "product knowledge," says Whitehead. For example, when pawning jewelry, it helps to know carats and grams, and the current price of gold.
Provide proof of value, if possible. That might be a receipt, a printout of a Web page showing the item and the sales price, or a written appraisal.
Know how much money you need and don't be afraid to ask for it. Being able to tell the pawnbroker exactly how much you need for gas to get you to work for the next week may sway him to hit your mark if it's within his range.
Reassure the pawnbroker that you are serious about repaying the loan and retrieving your collateral. According to Whitehead, a pawnbroker will be more likely to loan on the high side of the range if he or she believes it really is a loan, and not a purchase of your collateral.
If you can't repay your loan, you may have just sold your prized possession for a song.
Negotiate. If you're offered $125 on your gold necklace and would like more, there's no harm in asking for $150.
Of the approximately 11,000 pawnshops in the U.S., about 2,700 are members of the NPA. Whitehead recommends pawn customers do business with an NPA-affiliated pawnshop because the association "holds members to a higher level of ethics and standards."
Sherry again encourages consumers to try to avoid high-cost loans entirely.
"Particularly in this economy, we all should be planning for that day when our money doesn't make it to the end of the month," says Sherry. "The earlier you think about it, the more likely it is you'll be able to avoid the kind of short-term solutions that will actually make your money problems much worse."
As always, don't wait until you're in deep trouble to ask for a financial checkup at your credit union. In fact, the earlier you ask for a review, the better the outcome can be.
Published October 31, 2008
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