Payday Lending Laws Drive Traffic To Pawn Shops

While short-term lending in general has a pretty rough reputation, the pawn loan is the most ill-regarded arena in an already unloved category of consumer lending. By definition, a pawnbroker offers loans on items that are not accepted as collateral by traditional banks or lenders. Items that typically show up in pawn shops include jewelry, electronics and collectible items.

The loan amount a borrower can get from a pawnbroker is determined solely by the value of the item itself; as in most forms of short-term lending, there is no credit check. As a general rule, pawnbrokers are willing to lend 20 percent to 50 percent of what they assess an item to be worth, the borrower then has 30 days to pay the loan back, and the borrower can also opt to pay an additional fee (usually $100) to extend their loan for 30 days.

It’s also possible to sell items at a pawn shop — usually one will get a lower offer on a buy vs. on a loan.

Interest rates on pawn loans vary as they are regulated by states. At the low end of the spectrum, consumers will pay an APR of 25 percent a month, roughly comparable with a high-rate credit card. On the more typical end, however, pawn loan APRs tend to ring in at around 120 percent a year. That makes them a cheaper option than a payday loan in most cases — as those average an APR that is roughly double a pawn loan — but far, far more expensive that any mainstream product issued by a bank.

Pawn loans show up less in the headlines than their payday loan cousins, though far more often in popular culture. And while the occasional positive portrayal does come up — think A&E’s long-running reality hit Pawn Stars — most are not. That negative portrayal stems from two main areas. The first is the shared criticism of most high-interest, short-term lending arrangements — that they take advantage of desperate people in bad situations and force them to take what are essentially bad deals.

The second complaint, more specific to the pawn industry, is that unscrupulous pawn shops sometimes don’t ask enough questions about where the goods they are buying or offering loans on actually came from. Regulations require that pawnbrokers request proof of ownership before making a deal with a potential customer — but the less reputable players in the industry have a nasty habit of forgetting to ask. It is far from the entire industry, or even close to a majority of it, but the image is there and tends to make pawn lending unique among short-term loans in its connection to seediness.

Which is why it might be surprising to note that 2018 and 2019 have in many ways been strong growth years for the pawn industry in the U.S. and around the world. Consumers are leveraging pawn shops more frequently and investors are taking the industry more seriously as a vehicle for growth.

So what is driving the Pawnaissance?

Where Payday Lending Recedes, Pawnbrokers Flourish

Though efforts to regulate the payday lending industry on the federal level have become something of a complicated tangle, the regulatory picture on the state level has been a very different situation over the last half decade or so. Ohio, for example, passed an extremely limiting payday lending law that more or less changed most of the state’s payday loans into their less reviled cousin, the installment loan.

The move, in turn, pushed many of the state’s payday lenders away from the industry — either into installment loans, away from loan underwriting entirely or out of business. And while industry complaints were myriad about Ohio House Bill 123, one of the more recurring ones was a fear of unintended consequences. Capping access to short-term loans would limit consumers’ ability to get funds — but in no way have any effect on their need for them.

“We believe large gaps remain in the state-regulated credit market and more credit challenged consumers will have the most difficult time moving forward with HB 123 products,” Axcess Financial President Doug Clark told the Cincinnati Enquirer earlier this year when the law went into effect. The government’s intentions may be good, he said, but good intentions are no guarantee of good outcomes for the people the law is trying to protect.

And, six months later, guess what? The data is showing at least one of those unintended consequences coming to call — a spike in the number of consumers visiting pawn shops in Ohio. According to a recent economics paper by  Stefanie R. Ramirez of the University of Idaho, Ohio’s payday loan law was extremely effective at shutting down payday lending in the state. But it didn’t change how much people were borrowing short-term under unfavorable interest rates — instead it seems to have had the unintended effect of moving those borrowers to other industries with lax to non-existent credit standards. While the number of payday lenders in Ohio plummeted, the number of pawnbrokers increased by 97 percent.

“Policymakers may have simply shifted operating firms from one industry to another, having no real effect on market conduct,” Ramirez writes.

And the effect, Ramirez notes, is not limited to Ohio — it is a trend that tends to follow payday lending legislation whenever it springs up.

Robbie Whitten, chief executive of Money Mizer Pawns and Jewelers in Georgia, noted that as payday lending legislation spreads, pawn loans which are fast, easy to access and come with cash and almost no questions asked are becoming increasingly attractive to a class of borrowers who have an immediate need for funds and very few legal channels to turn to.

“We’ve kind of evolved into, I like to call it the poor man’s bank,” he told The New York Times.

And, in perhaps a worrying omen of things to come, being the poor man’s bank is apparently a growth industry.

Unexpectedly Growing Demographics of Interest

While most Americans have certain mental associations with the types of consumers drawn to the pawn lending model, it is worth noting that in many cases those borrowers are likely younger and far better educated than the image people have. As noted by a recent USA Today report, millennial college grads saddled with tens of thousands of dollars in student debt who get behind on payments rapidly find themselves first pushed into the deep subprime credit zone and short on funds in case of a major financial setback.

In such cases, those consumers are increasingly turning to high-cost forms of credit check-free borrowing like pawn loans and title loans. In her thirties, Jen Thompson of Lansing, Michigan told USA Today her loans went into default after she was taken in by a student loan refinancing scam, and that she has since used both pawn and payday loans to cover routine expenses, buy Christmas gifts for her kids and pay for school activities despite being fully employed.

Perhaps more interesting than the expanding interest among buyer demographics is the expanding interest of investors. Pawn shops, historically speaking, are “mom and pop” operations, and not the kinds of outfits that tend to attract eight-figure investments in the form of an $80 million senior credit facility to fuel their national and global expansion.

As of 2019, Smart Financial operates around 87 pawn shops spread across  Arizona, Georgia, Illinois, Iowa, North Carolina, North Dakota, Oklahoma, South Dakota, Texas, Virginia and three Canadian provinces. As of this week, the firm announced it would be adding to its store count with the acquisition of 11 Illinois stores, one Iowa store and seven Texas stores. The firm was founded a little under three years ago, and launched with the express goal of consolidating the fragmented and extremely varied world of pawn shops.

Not that Smart Financial ever refers to itself as a pawn shop. In its press releases, the firm seems to much prefer the term “specialty financial services and retail company.”

Whatever name one wants to call the rose, however, its business is pawn shops — and business has been good enough to up its store count by 33 percent in 2019, with more growth planned for 2020.

And, given the spread of sharp payday lending laws — and the unchanged reality that three-quarters of American consumers report being unable to come up with funds sufficient to cover a $400 expense — that bet on growth is increasingly looking like a strong one.