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I too, have had discussions with people who run pawn shops. The customers (who pawn objects to borrow money) are notoriously unreliable, bad credit risks. The

by brc 16y ago

I too, have had discussions with people who run pawn shops. The customers (who pawn objects to borrow money) are notoriously unreliable, bad credit risks. The banks/credit unions/credit card companies won't touch them. If they need money fast, they pawn something, and often don't return to pay the money back. The guy I have spoken with (who owns the pawn shop and is a tenant) is not a nice guy. In fact I find him a bit creepy. But he is a legitimate businessman providing a service for his customers, who, mostly, are happy with what they get for their money. The point I'd like to add to the above post, is that this business is going to exist in some shape or form anyway. By allowing pawn shops/payday loans to exist as legal businesses, at least the proprietors operate (generally) within the law, in plain view, and pay taxes. If you outlawed payday loans or brought in some type of regulations or maximum interest rate, the legitimate businesses would close. The lending would still take place, but instead of colorful shops on street corners, it would be taking place in back alleys. The lending conditions for the customers would get worse, and the penalties for not paying would extend past penalty fees and seized TVs and enter the leg-breaking scenario. It makes no sense at all to try and regulate the profits of payday loans and pawn shops.

hartror 16y ago
"It makes no sense at all to try and regulate the profits of payday loans and pawn shops." I agreed with you up to that point. Regulating them IS the point of allowing them, as long as the laws aren't draconian this will stop the bulk of these types of arrangements happening on the black market.
- brc 16y ago
  I'm all for regulating the businesses - who can own them, the sorts of contracts they can write, where they can operate, just like any other business. I said I'm against regulating the profits - in other words, let them set their own charges and interest rates.
sshumaker 16y ago
Pawn shop owners don't expect the customers to pay back the pawned item. They usually judge how desperate the poor sucker is and make a lowball price offer. Their business works by making way more money by selling the pawned item for way more than they purchased it. At the heart of it, they offer less money to those who need in the most. That's scummy, any way you want to slice it.
- brc 16y ago
  And that's where you're completely wrong and don't understand the business model. It's a common misconception. You're confusing a pawn shop with a second-hand dealer rather than a financing operation. It's exactly the same business as an investment bank, main street bank or credit card operation. They're all the same business model on a continuum that rates on the credit quality of their customers. The lack of knowledge about Pawn shops is common with middle-class folk - and understandable, as a poor person would probably not have the faintest idea on how to lease a Lexus either. Pawn shops work on interest payments. The pawned item is just the security on the loan. They're after the interest payments, not the physical goods. This is doubly so in the world of Walmart, where just about anything can be bought cheaply, new. The ideal customer for a pawn shop is someone who regularly pawns something, pays 25% interest per month on a regular basis, and comes back and pays the loan and has their item returned to them. It's not unusual for pawn shops to have regular customers who pawn some family heirloom every year to pay for christmas presents or car registrations, then pays the loan back, and does the same thing next year. The items for sale in a pawn shop are the result of failed loans. The storage area 'out the back' is the arena of the performing loans. If the display stock is larger than the stored stock, it shows the pawn shop is doing badly because they are making bad loans and having to sell a lot of old stuff. The actual business of selling the used stuff is just to (a) bring people into the store so they can get new customers and (b) dispose of the items that have been given up by customers, to recoup the capital to make new loans. It's not the main profit centre at all. The reason you get 25% LTV rate on your old TV is because the pawn shop knows you're a credit risk (otherwise, why would you be there), the TV set might be busted and they cannot possibly maintain a good knowledge on the market price of all pawned items, so they give a conservatively low estimate of the value so there is a chance of at least recouping the capital if the load goes bad : ie, the person does not pay it back. The analogy is that Banks would rather foreclose on a house and sell it rather than collect 30 years worth of interest payments. That's patently not true. While that might be the hypothesis of someone who has just had their house foreclosed, from the point of the view of the bank, they just want their interest payments and want nothing to do with the icky business of courts, keys and irate customers. The very last thing a bank wants is to own houses. That's why they'll do many things to try and get your loan performing again before doing the foreclosure. The unmistakeable sign of a failing bank is one that owns a lot of foreclosed property. The very same applies to Pawn shops. The quality of their loan book is the key to their business, not the quality of the merchandise in the glass cases. Again, I think the pawn business is a nasty business but these people fill a need in society, and the regular customers are surprisingly well informed on what a good deal is, and what isn't.

by brc 16y ago

hartror 16y ago

"It makes no sense at all to try and regulate the profits of payday loans and pawn shops." I agreed with you up to that point. Regulating them IS the point of allowing them, as long as the laws aren't draconian this will stop the bulk of these types of arrangements happening on the black market.

brc 16y ago
I'm all for regulating the businesses - who can own them, the sorts of contracts they can write, where they can operate, just like any other business. I said I'm against regulating the profits - in other words, let them set their own charges and interest rates.

sshumaker 16y ago

Pawn shop owners don't expect the customers to pay back the pawned item. They usually judge how desperate the poor sucker is and make a lowball price offer. Their business works by making way more money by selling the pawned item for way more than they purchased it. At the heart of it, they offer less money to those who need in the most. That's scummy, any way you want to slice it.

brc 16y ago
And that's where you're completely wrong and don't understand the business model. It's a common misconception. You're confusing a pawn shop with a second-hand dealer rather than a financing operation. It's exactly the same business as an investment bank, main street bank or credit card operation. They're all the same business model on a continuum that rates on the credit quality of their customers. The lack of knowledge about Pawn shops is common with middle-class folk - and understandable, as a poor person would probably not have the faintest idea on how to lease a Lexus either. Pawn shops work on interest payments. The pawned item is just the security on the loan. They're after the interest payments, not the physical goods. This is doubly so in the world of Walmart, where just about anything can be bought cheaply, new. The ideal customer for a pawn shop is someone who regularly pawns something, pays 25% interest per month on a regular basis, and comes back and pays the loan and has their item returned to them. It's not unusual for pawn shops to have regular customers who pawn some family heirloom every year to pay for christmas presents or car registrations, then pays the loan back, and does the same thing next year. The items for sale in a pawn shop are the result of failed loans. The storage area 'out the back' is the arena of the performing loans. If the display stock is larger than the stored stock, it shows the pawn shop is doing badly because they are making bad loans and having to sell a lot of old stuff. The actual business of selling the used stuff is just to (a) bring people into the store so they can get new customers and (b) dispose of the items that have been given up by customers, to recoup the capital to make new loans. It's not the main profit centre at all. The reason you get 25% LTV rate on your old TV is because the pawn shop knows you're a credit risk (otherwise, why would you be there), the TV set might be busted and they cannot possibly maintain a good knowledge on the market price of all pawned items, so they give a conservatively low estimate of the value so there is a chance of at least recouping the capital if the load goes bad : ie, the person does not pay it back. The analogy is that Banks would rather foreclose on a house and sell it rather than collect 30 years worth of interest payments. That's patently not true. While that might be the hypothesis of someone who has just had their house foreclosed, from the point of the view of the bank, they just want their interest payments and want nothing to do with the icky business of courts, keys and irate customers. The very last thing a bank wants is to own houses. That's why they'll do many things to try and get your loan performing again before doing the foreclosure. The unmistakeable sign of a failing bank is one that owns a lot of foreclosed property. The very same applies to Pawn shops. The quality of their loan book is the key to their business, not the quality of the merchandise in the glass cases. Again, I think the pawn business is a nasty business but these people fill a need in society, and the regular customers are surprisingly well informed on what a good deal is, and what isn't.