Pawn Shops Essay

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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.


  1. 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.
  2. 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).
  3. 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.

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