Pawn Shops Offer a Cheaper Alternative than a Payday Loan
Pawn shops tend to get a bad rap. These businesses are often lumped into the same category as payday loan and auto title loan lenders. However, pawn shops are a cheaper alternative than payday loans. Pawn shops operate by giving people loans with personal property as collateral. Many shops allow loan borrowers to repurchase their pawned item within a month, but they must pay for the amount loaned to them plus interest.
A Pawn Shop Loan Is Typically Cheaper than a Payday Loan
Most pawn shops offer cheaper loans than payday lenders. When a borrower decides to pawn something like a laptop, the pawn shop will offer him or her a loan. If the laptop owner is unable to pay the money back within a month, most shops will allow the item’s owner to pay for the interest and extend the payback time another month.
A payday loan usually features a two-week term, and they cost $10 to $30 for every $100 borrowed. According to the Consumer Financial Protection Bureau, or CFPB, the average payday advance comes with an annual percentage rate of 400 percent.
The Woodstock Sentinel Review reports that pawn shops tend to keep their loans on the low side. Dave Miles, an employee of the Pawntario pawn shop, said, “If you give someone $400 for a laptop and they have to come back and pay $480, that’s a high number to reach, but when you keep it at $150 or $175, it’s reachable.” Often, people don’t return for the items that they pawn. When this happens, the possessions end up for sale.
Escaping the CFPB’s New Regulations
While the CFPB’s new regulations are likely to cripple many payday lenders and alternate financial institutions, pawn shops have dodged the regulatory bullet. So, how did pawn shops escape the eye of the CFPB? According to the Washington Examiner, the agency refrained from including pawn shops in the regulations because it feels that they are a better option for borrowers.
Pawn shops don’t bring on the debt problems that caused the agency to come down on the payday lending industry. The rules proposed by the bureau are meant to put a stop to the debt traps that borrowers find themselves in when they take out loans that have excessively high interest rates.
How Pawn Shops Help People Avoid the Cycle of Debt
Pawning stuff doesn’t have the same risk of a borrower landing in a cycle of debt that a bad credit payday loan does. If a borrower is unable to pay back a loan, then the pawn shop keeps the pawned possession and the transaction is complete.
The CFPB pointed out two other reasons why borrowing money by pawning a possession is usually better than getting the funds through a payday advance. One reason is psychological. Those who borrow money by pawning something usually appreciate and understand the risks of giving a physical possession to a pawn shop. The other reason is practical. If a borrower pawns an item for cash, he or she is less likely to deal with a major financial fallout.
With auto title lending, borrowers risk losing their cars, which would make it hard for them to get to and from work while payday loan lending comes with the risk of damaging a borrower’s personal finances. The reason for this is that most payday loan lenders require access to a borrower’s checking account. If the lender withdraws money that the borrower had allocated for another purpose, then this could cause trouble with the person’s personal finances.
The Industry’s Lengthy History Speaks to Its Success
When the CFPB decided to omit the pawn shop industry from its regulation proposals, it referred to the pawn industry’s lengthy history. According to the agency, the pawn industry has existed in the United States since the 17th century. It is even referred to in the Old Testament.
Nick Bourke, an analyst for the Pew Charitable Trusts, has researched the payday loan industry thoroughly. He has even promoted regulations that would replace the industry. Bourke agrees with the CFPB’s decision to leave pawn shop lending alone. His support is also based on the fact that pawn loans don’t include the risk of debt traps that too frequently go hand in hand with bad credit payday loans.
But, Is Redirecting Borrowers to Pawn Shops a Realistic Option?
While the CFPB has understandable reasons for developing the proposals that it has, according to payday lenders, the proposed regulations give pawn shops an unfair advantage. To them, the fact that the rules may redirect borrowers to pawn shops prove that the regulations are ludicrous and unrealistic.
Jamie Fulmer, a spokesperson for the payday lending industry, said, “Our customers decide based on their personal circumstances and preferences whether to borrow $200 from us or to pawn their belongings; they don’t need the government to make that decision for them.” He also said, “The CFPB is trying to choose winners and losers, and worse, they’re trying to do so without ever bothering to talk to real consumers in order to understand their preferences or rationale.”
A spokesperson for the National Pawnbrokers Association, Emmett Murphy, said, “The rules would not significantly affect the pawn industry.” Statistics show that pawn brokers in states that have made payday lending against the law haven’t seen many changes in their business.
Pawn Borrowers are Different from Payday Loan Borrowers
Industry experts aren’t exactly sure how pawn borrowers are different from payday borrowers, but more people seek money from pawn shops than they do from bad credit payday loan lenders. The Federal Deposit Insurance Corporation found that among underbanked households, 10 percent have sought funds from a pawn shop while slightly more than 4 percent of them have taken advantage of the services offered by payday lenders.
In 2014, the pawn industry made $6.3 billion in profits. The following year, the payday industry earned $3.6 billion. Payday lenders are warning the CFPB and state officials that once the bureau’s regulations go into effect, borrowers will turn to costly alternatives like bounced checks and overdraft fees to cover their daily expenses.
The Most Common Transaction that Pawn Shops Make
Pawn shop owner Rick Wilson said, “The most common thing that we do as a pawn shop is lend money to people who need it.” He also said, “It’s cheaper than a payday loan and there are no credit checks.” When people need cash, they often turn to a bank if their credit is good. If their credit is bad or nonexistent, then they reach out to pawn shops or payday lenders. Because pawn shops are a cheaper alternative than bad credit payday loans, more borrowers should be considering this option. To learn more about the advantages of using a pawn shop, visit the Personal Money Store.