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Pawnshops provide cash in a pinch

Pawnshops have a major problem, and it's all in your head.

Mankind's first form of lending, dating back some 3,000 years, has been eclipsed by formal banking only relatively recently, roughly beginning in the Renaissance. That's a lot of shady pre-banking history, usurious practices and unsavory reputations to overcome.


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But that's just what this fiercely independent financial industry has undertaken in a big way during the past decade. Pawnbrokers note that last year alone, they provided $4.3 billion in very small, much-needed, short-term loans. Still, they get no respect.

Their biggest challenge is correcting the numerous public misconceptions about the pawnbroker's trade and its role in society. It's not an easy job. Much of the misinformation is based on fear and ignorance rather than firsthand experience. People who have never needed a pawn loan, much less set foot in a pawnshop, often denigrate the entire industry on principle alone.

A changing, regulated industry
Tom Sams, who heads up the Florida Pawnbrokers Association in the state with the most pawnshops (more than 1,300), says the lingering negative stereotype no longer widely applies.

While Sams readily admits that the old image was one "that pawnbrokers earned actually," he points to the transformation of today's operations.

"The pawn industry is going through a metamorphosis, with changes in both how they serve their customers and the quality of the stores themselves," he says. "Cash America, Value Pawn and other large firms came in with bright, beautiful stores and that is forcing a lot of people to do the same thing, to clean up their act and bring their pawnshops into the same quality as other retail establishments. We see major changes coming through this industry, along with the fact that we are a financial institution now."

Indeed, the federal government now classifies pawnshops as non-bank financial institutions. That puts them in a rather precarious gray area of overlapping federal, state, county and municipal rules and regulations that have become increasingly cumbersome, from both a compliance and enforcement standpoint.

Pawnshops get hit both ways. They must make a detailed report of all transactions to various law enforcement agencies on a daily basis, yet must fight, sometimes in court, to protect their customers' rights to privacy from those same agencies. Other financial institutions are protected under federal right-to-privacy legislation.

How the process works
Bob Benedict, director of the Dallas-based National Pawnbrokers Association, agrees that pawnbrokers are widely misunderstood.

"The high interest rates always bother some people, but they're high because their expenses are high," he says. "The cost of security alone would make most business people cringe. Their insurance rates are extraordinary; you would not believe it. And they obviously have to hire employees they can trust because they're handling money and merchandise all the time."

If you're lucky, you'll never need a pawn loan. But here's why you should be glad they exist.

Most of us understand the basic principle behind a pawn loan: you put up something of value, most often jewelry, a firearm, a consumer appliance or a musical instrument, as collateral for a cash loan.

The pawnshop agrees to hold it for a period of time, usually from 30 to 60 days, at which point you must pay the pawnbroker back with interest and fees, ranging anywhere from three-to-25 percent of the loan amount.

If you don't redeem your merchandise within the grace period, it becomes the property of the pawnshop, which then attempts to sell the item.

Popular pawnshop misperceptions
Once you get beyond the process of pawning an item, the facts stop and the fallacies begin. Here are 10 popular misconceptions about pawnshops:

1. Pawnshops charge exorbitant fees. Pawnbrokers are the first to admit their interest rates and fees are high. But, they note, they have to be. Ever wonder why you can't borrow $100 from your bank? It's because it costs a bank just as much to process a $100 loan as a $5,000 loan and bankers flat-out won't do it. Add to that a pawnshop's overhead, including the cost and training of knowledgeable, trustworthy employees and gemologists, administrative time for reporting to law enforcement and the hefty insurance premium to cover the valuables on premises, and that 25 percent figure starts to sound pretty reasonable.

2. Pawnshops charge whatever they can get. Not so. Pawnshop rates and fees are carefully regulated at the state level.

3. Most of the goods in pawnshops are stolen. Actually, because they are required to report every transaction to law enforcement, very little stolen merchandise winds up in pawnshops. A pawnbroker who accepts stolen goods runs the risk of losing both the loan amount and the merchandise. "We know for a fact that the maximum amount of stolen property in pawnshops is one-tenth of 1 percent," says Sams.

4. Pawnshops cater to thieves. Maybe years ago, but not anymore. Today, pawnbrokers are required to fill out identification reports on every item they accept as collateral, and many require thumbprints and even take photographs, hardly an inviting atmosphere for thieves.

5. Only the poor use pawnbrokers. In fact, a study by Georgetown University found that the average income for people who do business with pawnshops is roughly $34,000. Customers tend to be equally divided between men and women.

6. Pawnbrokers gouge you. Sams says most pawnbrokers will offer you about half of what they would expect to sell your merchandise for if they end up with it, which usually works out to be a quarter of what you paid for it new. But remember, this isn't a garage-sale proposition; you're only putting it up as collateral.

7. Pawnbrokers keep your stuff. Not true. Nationwide, roughly between 70-to-80 percent of all pawned goods are reclaimed.

8. Pawnbrokers want to keep your stuff. Au contraire, says Sams. "You do everything you can trying not to take the pawned stuff off the person," he says. "You want them to get it back. Our interest is in interest; we want to be a lending institution. We know that we're going to end up keeping some of it, but do we want it? No, we don't."

9. Pawnshops lead people into bankruptcy. Actually, pawnshops may be the one financial institution that the unbanked can still turn to for the short-term cash to stay afloat. "A pawnbroker never, ever causes bankruptcy because people are able to give up an item for a period of time that they can do without anyway, so you're never financially into a pawnshop for long-term debt," says Sams.

10. Pawnshops attract a bad element. Again, outdated. The trend today is toward well-lighted stores, professionally dressed employees and retail-quality displays. While pawnshops are far from being considered an asset to neighborhood property values, they are not the blight on the landscape they once were. Some pawnbrokers have even followed car dealers in adopting a no-haggle policy on their merchandise in a further attempt to blur the distinction between their business and traditional retail stores.

A heart in hard times
Despite a checkered past and lingering bad reputation, the pawnshop industry views itself as providing a vital community service: small loans on demand for folks who may be too proud to ask relatives or friends for a handout.

"Today, any little thing can occur to upset the income of a normal family," says Sams. "One little thing like Johnny falling and breaking his arm, the hospital is not going to serve them unless they have insurance or you pay in advance. It could be as simple as a prescription, which today could be $100.

"There can be any number of reasons you could need cash quickly. The need for the public is there. You can't go to a bank and borrow anything less than $5,000; they can't do anything less than that.

"The pawnbroker services people with $10 loans, and we do a tremendous amount of $10 loans."

Jay MacDonald is a contributing editor based in Florida.

-- Posted: June 13, 2002




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