Payday loan laws drive traffic to pawn shops

While short-term loans usually have a pretty tough reputation, pawnshop is the most frowned upon arena in an already unloved category of consumer loans. By definition, a pawnshop offers loans on items that are not accepted as collateral by banks or traditional lenders. Items that typically appear in pawn shops include jewelry, electronics, and collectibles.

The amount of loan a borrower can get from a pawnshop is determined solely by the value of the item itself; as with most forms of short term loans, there is no credit check. Typically, pawn shops are willing to lend 20-50% of an item’s appraised value, the borrower then has 30 days to repay the loan, and the borrower can choose to pay off as well. an additional fee (usually $ 100) to extend their loan for 30 days.

It is also possible to sell items through a pawnshop – usually one will get a lower bid on a purchase compared to a loan.

The interest rates on pawn shops vary as they are regulated by the states. At the lower end of the spectrum, consumers will pay an APR of 25% per month, roughly comparable to a high rate credit card. More typically, however, the APRs on pawn shops tend to ring at around 120% per annum. This makes it a cheaper option than a payday loan in most cases – as these have on average an APR that is roughly double that of a pawnshop – but much, much more than n ‘any consumer product issued by a bank.

Pawn shops are less in the news than their cousins ​​payday loans, although much more often in popular culture. And while the occasional positive portrayal does arise – think about the long-standing reality of A&E Pawn stars – most are not. This negative representation stems from two main areas. The first is the shared criticism of most short-term, high-interest loan deals – 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 shop industry, is that unscrupulous pawn shops sometimes do not ask enough questions about the real provenance of the goods they buy or offer loans. Regulations require pawn shops to ask for proof of ownership before entering into a deal with a potential client, but less reputable players in the industry have a bad habit of forgetting to ask. It is far from the industry as a whole, if not close to the majority, but the image is there and tends to make the pawn shop unique among short-term loans in its link with precariousness.

This is why it may be surprising to find that 2018 and 2019 were in many ways years of strong growth for the pawn shop industry in the United States and around the world. Consumers are using pawn shops more frequently and investors are taking the industry more seriously as a driver of growth.

So, what drives Pawnaissance?

Where payday loans decline, pawn shops flourish

Although efforts to regulate the payday loan industry at the federal level have become a kind of complicated tangle, the regulatory table on the State level was very different situation over the past half-decade or so. Ohio, for example, passed an extremely restrictive payday loan law that more or less turned most of the state’s payday loans into their less hated cousin, the installment loan.

This move, in turn, pushed many state payday lenders away from the industry – either in installment loans, or in full loan underwriting, or in going out of business. And while industry complaints were endless about Ohio House Bill 123, one of the most recurring was fear of unintended consequences. Capping access to short-term loans would limit the ability of consumers to obtain funds, but would have no effect on their need.

“We believe that significant gaps remain in the state-regulated credit market and that more consumers with credit problems will find it most difficult to move forward with HB 123 products,” said Doug Clark, Chairman of Axcess Financial. Cincinnati Applicant earlier this year when the law went into effect. Government intentions may be good, he said, but good intentions do not guarantee good results for the people the law tries to protect.

And, six months later, guess what? The data shows at least one of those unintended consequences – an increase in the number of consumers visiting pawn shops in Ohio. According to a recent economy paper By Stefanie R. Ramirez of the University of Idaho, Ohio’s payday loan law has been extremely effective in stopping payday lending in the state. But that didn’t change how much people borrowed on the short term with unfavorable interest rates – instead, it seemed to have had the unintended effect of moving those borrowers to other industries with lax credit standards. or none. While the number of payday lenders in Ohio has fallen, the number of pawn shops has increased by 97%.

“Policymakers may have simply moved operating companies from one industry to another, having no real effect on driving the market,” Ramirez writes.

And the effect, Ramirez notes, isn’t limited to Ohio – it’s a trend that tends to follow payday loan laws whenever it pops up.

Robbie Whitten, managing director of Money Mizer Pawns and Jewelers in Georgia, noted that as payday loan legislation expands, pawn shops that are quick, easy to access and come with money and almost no questions asked are becoming more and more attractive to a category of borrowers who have an immediate need for funds and very few legal avenues to turn to.

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

And, in perhaps an ominous 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 some mental associations with the types of consumers attracted to the pawnshop model, it should be noted that in many cases these borrowers are likely younger and much better educated than the picture than the people have. As noted by a recent United States today report, millennial college graduates struggling with tens of thousands of dollars in student debt that quickly delay payments find themselves first pushed into the zone of deep subprime credit and strapped for funds in the event of a major financial setback.

In such cases, these consumers are increasingly turning to expensive forms of borrowing without a credit check, such as pawn shops and title loans. In her 30s, Jen Thompson from Lansing, Michigan said United States today her loans defaulted after being the victim of a student loan refinance scam, and she has since used both pawn shops and payday loans to cover living expenses, buying Christmas presents for his children and pay for school activities despite his full employment.

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

As of 2019, Smart Financial operated approximately 87 pawn shops spread across Arizona, Georgia, Illinois, Iowa, North Carolina, North Dakota, Oklahoma, South Dakota, Texas, Virginia and three Canadian provinces. Starting this week, the company announced that it will increase its store count with the acquisition of 11 stores in Illinois, one store in Iowa and seven stores in Texas. The company was founded just under three years ago, and started with the express purpose of consolidating the fragmented and extremely diverse world of pawn shops.

Not that Smart Financial presents itself as a pawnshop. In its press releases, the firm seems to prefer the term “specialist financial services and retail company”.

Whichever name you want to call the rose, however, its business is pawn shops – and business has been good enough to increase its store count by 33% in 2019, with further growth forecast for 2020.

And, given the spread of tough payday loan laws – and the unchanged reality that three-quarters of U.S. consumers say they are unable to find sufficient funds to cover a $ 400 expense – this gamble on growth appears to be worth it. louder and louder.

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NEW PYMNTS DATA: TODAY’S SELF-SERVICE PURCHASE JOURNEY – SEPTEMBER 2021

On: Eighty percent of consumers want to use non-traditional payment options like self-service, but only 35 percent were able to use them for their most recent purchases. Today’s Self-Service Shopping Journey, a PYMNTS and Toshiba Collaboration, analyzes more than 2,500 responses to find out how merchants can address availability and perception issues to meet demand for self-service kiosks.


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About John McTaggart

John McTaggart

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