The war on pawnshops

By Christian Science Monitor

As a member of one of the world's oldest professions, David Wilson, a pawnbroker, is sensitive to the way many people view his chosen trade.

Sleepy middle-class neighborhoods, in particular, look down upon a business that takes stuff in hock for cash, Wilson concedes.

But he's trying to change that perception. He vacuums the carpet at his tidy Capital Cash store in Raleigh, N.C., twice a week and keeps no guns there. He even calls it a "pawn store" instead of a pawnshop.

"Everybody needs money," he says, "but I want to lend a favorable impression of that transaction."

Loans of last resort

Wilson is one of a number of pawnbrokers who are sprucing up their image in an attempt to banish the often well-earned stigma that pawnshops are seedy, dangerous places and a symbol of last resort in an uncertain economy.

Pawnshops really are just loan companies that take small items as collateral. It is a competitive industry, so annual interest these days is usually around 22%. An estimated 75% to 90% of loans are repaid with interest, but if not paid after a designated period of time, often as few as 90 days, the operator is free to sell the collateral. Since most loans are granted for well under the value of the collateral, the pawn operator can sell the items at bargain prices and still make money.

Raleigh and dozens of other U.S. towns and cities are taking steps to limit the number and location of pawnshops.

"What's happening is that pawnshops are escaping the normal boundaries where we're supposed to keep them," says Lendol Calder, a history professor at Augustana College in Rock Island, Ill., and the author of "Financing the American Dream: A Cultural History of Consumer Credit."

• In Raleigh, officials are seeking to tighten zoning rules to keep the city's resident-to-pawnshop ratio at or below the current 1 for every 19,000 residents.
• Plymouth, Minn., has raised pawnshop licenses to a prohibitive $12,000 a year.
• Jacksonville, Fla., recently capped interest rates at 36% for pawnshops and payday lenders.
• Prince George's County, Md., has limited the number of pawnshops at 31 and declined to renew revoked or abandoned licenses after the county council heard testimony that up to $1 million in stolen goods moved through the local pawn community every year.

"I don't think any neighborhood wants a pawnshop to open up next door," says Eric Olson, a Prince George's County councilor.

Pawnshops draw in middle class

Municipal planners, for their part, worry that pawnshops are not only indicators of a declining economy but that their presence invokes a "self-fulfilling prophecy" that the economic realities in a particular neighborhood will continue to worsen, says Jean Ann Fox, consumer protection director at the Consumer Federation of America in Washington, D.C.

Yet these days, planners see more people using pawnshops who don't appear to be traditional customers. One of them is Monica Martinez. A computer programmer, the Raleigh resident had always stayed away from "seedy" stores but has become a regular customer at Capital Cash, where she's selling off a stash of jewelry to pay a hefty tax bill. "It's either this or leave the country," she says.

Origins of the pawnshop

Pawnshops date back at least 3,000 years. The Medicis dabbled in pawn, as did Queen Isabella of Spain, who put the royal jewels in hock to finance Christopher Columbus' trip to the New World.

Alternatively, easy, high-interest lending has been a concern since the Code of Hammurabi, which limited the interest on hocked silver in Babylon to 20% per annum (today's pawnshops offer around 22%).

"Pawnshops began as kind of an alternative to usurious lending, and it was often done by charitable organizations and even churches," says law professor Bob Lawless, a credit expert at the University of Illinois College of Law. "But I'm not sure the pawnshop industry is seen as particularly consumer-friendly right now."

Number of pawnshops increase

There were 6,900 pawnshops nationwide in 1988 and 11,226 today, according to the National Pawnbrokers Association. Surprisingly, most of those, by number but not per capita, are in suburbs, according to the Brookings Institution in Washington.

Flat wages and mounting debt are problems that drive even socialites in Beverly Hills, Calif., to pawn their Pradas. "Financial insecurity has really spread up the income ladder," says Brookings fellow Matt Fellowes.

• Video: The cure for the middle-class crunch

Meanwhile, the pawnshop industry says it's changing in response to the new suburban realities. One vision of the pawn industry's future can be found in Pawn America, a 15-store chain based in Burnsville, Minn., where shiny floors, professional displays and an upbeat attitude make the stores seem like a cross between "a Caribou Coffee and a Best Buy," says Michael Deering, a Pawn America spokesman.

"For pawnshops to be, say, a Starbucks of credit, they are going to have to appeal to a market that has maxed out its credit cards, which would take one big economic downturn," says Fellowes. "Could they reinvent their brand? Yes, but it'll take some time."

This article was reported and written by Patrik Jonsson of The Christian Science Monitor.

Published July 11, 2007