In Tough Times, Pawnshops Are Thriving
Tech firms are faltering. Airlines and hotels are struggling. But at least one sector of the economy is cashing in on tough times: the pawnbroker business.
Neighborhood pawnshops, as well as the handful of national pawnbroking chains, are reporting a jump in their money-lending business as the economy edges toward what many analysts believe will be recession. As consumers find themselves in need of cash, more are getting loans in a time-honored way--by hocking their jewelry and other valuables.
Even Wall Street has spotted the trend. The nation’s biggest pawn chain, Cash America International Inc., has seen its stock price more than double since the beginning of the year.
Since the Sept. 11 terrorist attacks, the Dow is off 8% and Nasdaq is down 12%, but Cash America’s stock has risen 8%, largely because of a company forecast last week of improved operating profit.
In California, consumers behind on electricity bills and other household expenses are turning to the state’s 700 pawnshops for help, said Ken Smith, president of the Collateral Loan & Secondhand Dealers Assn. of California, the pawn industry’s trade group.
The industry is touchy about being perceived as profiting from others’ misfortunes, especially when the typical $75 pawnshop loan in California carries an annual interest rate of 55.5%.
Still, “there are a lot more people today who need our services than a year ago, there’s no doubt about that,” said Smith, owner of Cindy’s Pawn in the Riverside County community of Hemet.
Pawnbroking is a business that tends to thrive in tough times as strapped workers seek emergency funds and penny-pinching consumers prowl the aisles for bargain merchandise. The industry’s core clientele tends to be those who live on the financial edge, easily toppled by a car repair bill or an unexpected medical expense. According to a 1998 study by the Credit Research Center at Georgetown University, nearly 65% of consumers who patronize pawnshops have annual household incomes less than $25,000.
But those in a bind often possess something of value to hock.
Vito Morgese, 46, began pawning his vintage guitars and other musical equipment earlier this year when tips from his Hermosa Beach restaurant job plunged after “all those techies stopped ordering $200 bottles of wine.” Currently off work recuperating from a motorcycle accident, Morgese said he has 15 items in hock. He recently hobbled into Lawndale Jewelry & Loan on crutches, clutching an antique china teapot and looking for another cash infusion.
Civilization’s oldest form of lending, pawning is mentioned in the Old Testament and has been immortalized in literature and song. The childhood ditty “Pop Goes the Weasel” comes from a 19th century English tune in which “pop” was slang for pawning and a “weasel” referred to a clothing iron--a common household item to hock in the 1800s.
Dogged by a reputation for preying on the poor and fencing stolen property, the industry has worked hard to clean up its image as it has become a crucial alternative source of credit. A recent estimate puts the number of U.S. pawnshops at about 12,000, up nearly 75% from the late 1980s.
Experts say liberalized interest ceilings in many states--mainly Texas and other Sunbelt states that permit far higher rates than California--fueled the industry’s growth. The trend also led to the emergence of publicly held chains. By using computerized databases to appraise collateral, and by offering bright, inviting storefronts, chains such as Cash America, First Cash Financial Services Inc. and EZCorp Inc. attracted new customers.
Starting in the late 1980s, these firms grew rapidly by gobbling up independent pawnshops and opening new outlets. Fort Worth-based Cash America, for example, has 420 stores in 18 states.
But as what is sometimes called the world’s second-oldest profession was becoming part of the corporate community, the nation’s record-breaking economic expansion of the late 1990s and the accompanying low unemployment rates crimped the industry’s lending business. The emerging payday loan industry siphoned off customers as well.
Things have been looking up lately as the economy has sagged. Cash America’s most recent quarterly report shows loan volume up 6%. First Cash says its volume also is up 5% to 6% this year, and EZCorp says its same-store loan growth has increased nearly 10% year to date.
Industry experts say loans typically account for about 70% of the trade’s revenue and profit, with the sale of hocked items a distant second.
Sheila Diamond, manager of Diamond Jewelry & Loan in Van Nuys, said more pawn customers are complaining about lost jobs and hours, as well as higher power bills.
“I’ve had a lot of people say in the last few weeks, ‘I’ve never come into a pawnshop before,’ ” Diamond said.
What many discover is how quick and easy it is to get a loan in a pawnshop. Banks and credit card companies ask questions about income and credit history. Pawnbrokers care only about the value of the collateral, their security if a borrower can’t pay back the loan.
In California, pawn contracts last four months. To retain ownership of the pledged collateral, the borrower must pay off the loan within that period, or at least pay the interest and renew the contract.
First-time borrower Ervin Orellana dropped by Diamond Jewelry recently to get a $100 loan for a trip to Fresno. The Van Nuys cook said he was short of cash partly because his employer has cut back on overtime. Diamond weighed the gold necklace he pledged as collateral, filled out a contract, took Orellana’s thumbprint and, in less than five minutes, had pressed five crisp 20s into his palm. Orellana said he was impressed with the speed and the terms.
“It’s not too much,” he said of the interest rate. “They charged like $17, but they give you four months to pay.”
Orellana said he paid $375 for the necklace several years ago. But pawnshops seldom lend for the full value of the collateral--ensuring themselves a profit if the customer doesn’t redeem the item.
Like most pawnshop borrowers, Orellana plans to pay off his debt before the end of the four-month loan period. But if he renewed his $100 loan twice, to cover a full year, he would pay an annual interest rate of 51%. The state’s complicated rate structure produces loan rates that vary widely, depending on the amount borrowed. For instance, the APR--annual percentage rate--on a modest $20 loan is 105%, but on a $200 loan it falls to 33%. Fees for storing bulky items or for failing to pay off a loan on time drive the charges even higher.
But that’s cheap compared with California’s payday loan companies, whose two-week loans cost more than 450% on an annualized basis. It’s also a bargain compared with pawnshops in states such as Texas, where loan contracts are shorter and annual rates often soar above 200%.
“That’s why there aren’t too many pawnshops in California,” said Rick Wessel, president of Arlington, Texas-based First Cash Financial Services Inc., the industry’s No. 3 chain.
Pawnbrokers say their charges are justified, considering all the handling, storage, security and customer service that go with making tiny, collateralized loans.
“I’ll lend $5 so people can buy lunch or a get a couple gallons of gas,” said Linda Hoffman, owner of Lawndale Jewelry & Loan. “Try getting that at your local bank.”
Consumer watchdogs concede that pawnshops provide a needed service, extending credit to consumers typically ignored by banks and credit unions. Consumers Union is taking a neutral stance on a bid by California pawnbrokers for three types of fee increases. The last hike was 10 years ago.
Though shop owner Hoffman says her retail sales are holding up, others say the soft economy is taking a toll on that side of their business. David Neuman, owner of Cash Loan Inc. in South San Francisco, said shoppers aren’t snapping up expensive items like they did last year.
“We sold a lot more high-end merchandise during the boom,” he said. “We’re not seeing those impulse buys now.”
Still, some consumers who typically shop at conventional stores turn to pawnshops when they’re feeling pinched. And because pawnbrokers often make smaller loans on pledged items when times are tough, they, in effect, acquire the merchandise at a lower price if those goods are forfeited.
At least 70% of customers reclaim their goods. The big difference right now, said Neuman, is that customers are borrowing more to tide themselves over and taking longer to pay back their loans.
Morgese, the injured restaurant worker, falls into that category. He says he is hocking new items just to pay the interest costs on valuables he already has pledged.
“Some people invest in stocks and bonds. I buy collectibles,” Morgese said. “If I get in a pinch, I know I can always use them for collateral. I haven’t lost anything yet.”
