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Pawn shops engage in pawn lending, or pawn-broking, as their primary business. The pawn loan is a loan secured by collateral—traditionally small portable items but in recent years has included large items. The terms of this short-term credit arrangement are specified by the pawnbroker, and the borrower has to sign a credit agreement with the pawnbroker. Pawn shops have been a feature of the U.S. economy since its earliest days, and evidence exists that pawn shops have existed since the medieval era. Changes in the pawn shop industry reflect changing economic and cultural conditions in the United States from the late 19th century until today. Beginning as dark stores in poor neighborhoods, the modern industry is more commonly associated with the clean and organized nature of the modern retail sector and has become a major business with the ability to find investors and achieve corporate status and issue stocks. While having a large presence in the southern and southwestern United States and serving lower-income borrowers, pawn lenders became a more visible presence in the economic recession of 2007 to 2009 in light of the increasing socioeconomic diversity of borrowers and the international spread of American-owned pawn shops to Mexico.
Structure Of Pawn Loans
Pawn-broking involves the lending of money by one individual (the pawnbroker) to another with the collateral of the loan being some item of value. Households can pawn items such as jewelry, air conditioners, televisions, tools, and some larger items to obtain a small loan. To determine whether to lend and how much to lend, pawnbrokers do not consider the creditworthiness of the borrower but instead consider the value of the item, which serves as collateral. Pawn loans are generally nonrecourse loans, such that if the borrower defaults, the lender can retain possession of the pawned item and has no further recourse if the value of the item is less than the original value of the loan. The result of this arrangement is that to insure against loss on pawn loans, the lender will usually make a loan only at a fraction of the retail value of the item that is pawned. To determine the value of items, the pawnbroker will base his or her assessment on past experience with similar items, pricing through Internet sites, industry valuation guides, commodity prices for pawned items having significant precious metal content, and, in some cases, more sophisticated valuation models.
The pawn ticket (or a receipt for items pawned) describes the terms of the loan. This document includes basic information on the consumer, a description of the pawned item, the length of the loan (usually a month), the annual percentage rate, the required payment for redemption of the loan, and information on other fees. Traditionally, loan amounts tended to be relatively small ($100–$200) and consistent with state-level small loan laws, but newer types of pawn loans have been developed to permit the pawning of high-value items. The annual percentage rate on such loans can range from 12 percent to more than 200 percent, depending on the legal restrictions placed by state and local authorities as well as the type and value of the item being pawned. If the party receiving a loan fails to repay the amount loaned, plus interest and fees, within a specified period of time (1 month plus a grace period of between 1 and 2 months), the pawnbroker is permitted to take ownership of the pawned item and may sell it to recover the money loaned, plus fees and interest.
History And Modernization Of Pawn Industry
From the end of the 19th century to the latter part of the 1930s, the pawn industry grew; however, it began to decline in the mid-20th century because of reductions in the number of portable items that were easily pawned, rising personal incomes, and improved social welfare programs. By the 1970s, a rapid resurgence of the pawn industry began that continued through the early 2000s as a result of the rise of the portable consumer electronics market, growing population, stagnation in incomes among the poor and working class, and reduced access to short-term, nonrevolving credit arrangements from the banking sector. From the mid- 1980s until 2001, the number of pawn shops grew from approximately 5,000 to about 12,500. Companies in the pawn industry expanded to such an extent that they became publicly traded corporations, including companies such as Cash America, EZCORP, and First Cash Financial Services. Almost all of the companies in this industry are for-profit firms, with few exceptions. One important exception is the Provident Loan Society of New York, which is a nonprofit lender of small-to medium-size loans similar to a pawn loan and which has been making such loans for more than 120 years.
In the context of modern culture, the idea of the pawn shop has risen to broader popular consciousness in shows such as Pawn Stars, Hardcore Pawn, and Cajun Pawn Stars. Glamorized versions of the pawn industry, these shows provide an idea of the nature of the modern industry. Up until the late 1980s, the typical pawn shops were single-store operations and were mostly located in old buildings in older commercial areas. In some shops, items forfeited from previous pawn loans were displayed in a chaotic arrangement, which included hub caps, stereos, tools, and a wide variety of other products. In more urban settings, wares for sale and pawned items were guarded behind a wire mesh divider, behind which store employees also stood. While many such stores still operate, the market in urban areas is increasingly characterized by professionally run and operated chain stores, where clients are greeted by well-organized display of products and knowledgeable and uniformed staff. Collateral for modern pawn loans tends to be relatively high-value jewelry, tools, small household appliances, musical instruments, sports equipment, household electronics (e.g., DVD players, video game consoles, and televisions), and in some cases, even larger items such as motorcycles.
The rise of an alternative form of high-cost short-term credit, known as the payday loan, placed competitive pressure on the pawn shop industry, and the number of pawn shops began to decline modestly in the mid-2000s. As a result, pawn shops began to offer a wider variety of credit products such as payday loans and began making pawn loans for higher-valued items, and firms expanded operations to Mexico and other countries where pawn lending was growing. Many of the remaining firms in the pawn industry now have significant payday loans and other alternative financial services. Moreover, modern pawn shops have embraced the opportunities to serve as a retail intermediary by offering to directly buy goods for resale at the pawn shop, and they have taken an increased role in precious metals intermediation by buying goods with sufficient content of gold and other precious commodities to be melted down and resold. While borrowers of pawn loans are likely to be poorer than borrowers of other alternative financial services, such as payday loans or auto title loans, the number of individuals who make use of such products has grown more diverse with the changing business model.
The regulatory environment of the pawn lending industry heavily depends on the state within which a business operates, with southern and southwestern states having the largest presence of pawn shops because of more permissive regulatory structures. Some groups fear that pawn shops continue to engage in the purchase of stolen goods, and while there is some evidence that this problem persists, state and local authorities, as well as industry representatives, have developed better record-keeping practices to reduce this problem. As with all alternative financial services, consumer advocates express concern that pawn shops prey on poor individuals, while industry advocates tend to argue that the only alternative for many borrowers of pawn loans would be to make use of loan sharks. Notwithstanding these concerns and debates, the industry is well-entrenched and will likely persist as part of the alternative financial services market in the United States.
- Caskey, John. “Fringe Banking and the Rise of Payday Lending.” In Credit Markets for the Poor, Patrick Bolton and Howard Rosenthal, eds. New York: Russell Sage Foundation, 2005.
- Dugan, Ianthe. “High-Class Pawnshops Fill a Lending Void: Some Can Charge Interest Rates Exceeding 200 Percent; No Credit Check and Little Paperwork.” Wall Street Journal (October 23, 2013).
- Prager, Robin. “Determinants of Locations of Payday Lenders, Pawnshops, and Check-Cashing Outlets.” Washington, DC: Division of Research and Statistics and Monetary Affairs, Federal Reserve Board, 2009.