When pawnshops make sense
Pawnbroking is booming despite interest rates of 8 per cent – a month. A sign of recession and a haven for the feckless you may say – but think of it as banking and it makes more sense.
A conventional bank may – though in the current climate may well not – give an unsecured loan but at a rate that reflects its risk. It will also give a secured loan at a lower rate but it will impose significant charges including valuation fees.
For a long-term secured loan such as a house mortgage, those charges may offset against the high interest rate but the loan could neither be given in the short term or for the short term.
Stop thinking of pawnbroking as a shop with three balls above a window of second-hand goods and start thinking of it as a bank. These shops are no more involved in the business of selling unredeemed pledges than a mortgage bank wants to sell repossessed homes: the business model is lending, not default.
Now look at the choice from the customer point of view. The client has a diamond necklace that is worn occasionally: he or she thus has a tangible asset but not a liquid one. If it was sold the price could be poor and the asset would not be there for next time it was wanted for wearing.
During the months when the necklace is not worn it is a useless asset, earning nothing and giving no intangible pleasure. Using it as security for a loan is no loss therefore. The broker may have a low loan-to-value ratio – perhaps £500 cash for a £1,000 item – but when the whole £1,000 value was not being used that is not a problem.
Whereas the mortgage lender is providing finance to buy an asset and borrowers want to maximise loan-to-value, the pawnbroker is lending against an existing asset that is temporarily unused.
A pawnbroker has no valuation charges and offers instant cash with no need to ask about existing debt levels, superior charges, blemished credit references or even query the borrower’s identity. His physical collateral of the necklace is better than the paper title to property a mortgage bank would want.
For someone desperate for £500, paying £40 and losing the use of a necklace they did not plan to use anyway, may not be feckless. No wonder business is booming. But the pledged items are only for sale if the borrowers have defaulted – and that is bad banking in anyone’s book.
