Hard Times Their Good Times : Economy: Pawnbrokers are lending so much that they’re running out of cash. Their success is often a sign of recession.


Paul Trietsch is no economist, but if the ledger book at his Reseda pawnshop is any indication, he said, the country is headed for a deep recession.

“The demand for loans is so great, we have to turn people away,” he said. “It started about in June and it just keeps building.”

Trietsch, owner of Traders Inc. since 1954, said he normally has enough cash on hand to make loans up to $5,000 apiece. Now, he said, he’s lucky if he can come up with $200 for a loan because he has already lent out so much cash on pawned items.

Pawnbrokers, traditionally a reliable barometer of economic distress, are reporting an increase in business at the same time that mainstream retailers and lenders are suffering amid the recession. Demand for both quick, borrowed cash and relatively inexpensive second-hand merchandise has increased at most of the San Fernando Valley’s pawnshops since the economy began lagging during the summer.


But actual lines have not been forming outside pawnshops as they do during severe recessions or depressions, and pawnbrokers echo the predictions of many economists that the worst--or the best, depending on one’s viewpoint--is yet to come.

“If it gets worse, we’ll be the first to see it because they will line up,” said Denis Hooker, president of the Collateral Loan and Second-Hand Dealers Assn., which represents 260 of the 450 pawnbrokers in California.

Indications that the economy is worsening can be seen in the items people are pawning or selling to local pawnshops: power tools from jobless construction workers; Rolex watches and big diamonds from retailers facing payroll deadlines; expensive cars from once-prosperous business owners now facing foreclosure or bankruptcy.

Usually, pawnshops deal in smaller items such as jewelry, guns, cameras and video cassette recorders that might help a customer pay rent, buy food or pay bills.


But unlike most pawnshops, The Collateral Lender in Van Nuys accepts cars as collateral against big loans that customers take out to meet business expenses or other cash emergencies, explained Sam Gonen, the store’s owner.

The Collateral Lender, which obtained a car dealer’s license about one year ago, recently added a Corvette, a Mercedes and a Lincoln to its collateral inventory, said store manager David Goldstein. “It’s what we’re waiting for,” Goldstein said of the recession.

Pawnbrokers make money in two ways: They can buy items outright and resell them from their stores at higher prices, or, more commonly, they accept items as collateral for loans payable in four months at interest rates set by the state. Interest rates range from 20% to 60% annually, depending on the loan amount.

Sam Rosenfeld, who has owned Collateral Loans Inc. in Reseda for nine years, said his sales last month were up about 10% over November, 1989. But his loans in November were actually down 9% from the same period last year, a decline that he attributes in part to the opening of a competing pawnshop down the street.


“They’re not at the doors yelling, ‘I’m out of work, I need money,’ ” Rosenfeld said. “We just don’t hear that.”

Usually, bad times are a good time to be in the pawn business because of increased demand for both loans and inexpensive merchandise. People recently laid off from jobs often come to pawnbrokers for money to avoid the hassle of applying for a bank loan. It takes about five minutes to get a loan from a pawnbroker. Other customers are fleeing high-priced shopping malls looking for bargain second-hand merchandise.

But severe economic problems can spell trouble for pawnbrokers too, because people eventually curtail all spending, even for second-hand items, Hooker said.

Several local pawnbrokers said they have recently noticed more owners of small businesses seeking loans to make ends meet. Many are retailers who appear to have been hit by the slump in Christmas sales, they said.


Last week, for example, a woman pawned her diamond earrings and pearls at The Collateral Lender because a $25,000 payment was coming due on her leather-goods store, which she said recently shut down because of poor sales, Gonen said.

Steve Marks, manager of Mitch’s Pawn Shop in Van Nuys, said restaurant owners have been pawning their expensive jewelry at his store to pay bills. More and more, customers tell of having lost their jobs to cost-cutting by employers, he said. “People walk into these places every day that I would never expect,” said Mike Foster, a sales clerk at Marks’ store.

In a reflection of the sluggish construction industry, skill saws from out-of-work carpenters are piling up in Trietsch’s shop. It used to be rare for the store to carry more than two or three at a time, but now 15 saws take up several shelves, he said. Trietsch sells the saws for about $65 each, compared with about $140 new.

The same is true at Loan Mart Inc. in Van Nuys, where skill saws and drills are competing for store space with VCRs and guns. “We really feel the effects now,” said Arline Dow, the store’s co-owner. “I think when real estate went down, that caused a lot of problems.”


Marks said that every week his store must sell gold from its jewelry stock to smelters to generate cash for its increased loan demand. He said the shop’s loans have doubled over the past month.

The store’s brisk business means a short-term cash crunch. But in the end, profits can be handsome because stores typically lend about 25% of the price for which a pawnbroker can sell an item, shop owners said. Interest rates decrease as the loan amount increases, and state law requires loans to be repaid in four months.

For an outright sale, customers might get about half the item’s resale value.

For example, Goldstein said he would lend a visitor $15 to $20 for his 18-karat gold wedding band, which Goldstein said he could sell for $60. The ring could be redeemed in four months for a fee of $3, which equals an annual interest rate of 60%. Goldstein said he would buy it for $25 (the visitor’s wife bought it from a jeweler for $300).


“That’s gold weight,” Goldstein said of the ring. “That’s melt for us.”

Loans typically make up about 85% to 95% of a pawnbrokers’ business, and sales account for the rest. Most of the second-hand merchandise is jewelry, Goldstein said.

Most small pawnshops have between $60,000 and $100,000 in loans outstanding, Hooker said, while outstanding loans at the biggest shops may total $3 million.

Hooker stressed that pawnshops are a poor place to try to sell stolen goods because police stop by every day to check newly purchased or pawned items against records of stolen property. Also, sellers are required to leave behind a thumb print and must show a valid driver’s license or other government-issued identification.


About 85% of customers eventually return to redeem pawned items, Hooker said. But in another sign of economic distress, pawnbrokers are reporting that fewer people are redeeming items, and more are renewing loans for an additional four months. Trietsch, for example, said the number of renewals in the last few months has increased by 15% from last year.

Unlike other lenders, pawnbrokers aren’t left empty-handed if borrowers default. They just sell the collateral. “Whatever you do, you don’t lose your money,” Marks said.