Pawns in the game (continued)

In addition to regular borrowers and sellers, pawnshops have regular buyers, people who come in every few days looking for deals on everything from electric guitars to DVDs. There are some decent bargains to be had in pawnshops, but no real steals; pawnbrokers are shrewd judges of value, after all. Keithline says buyers and sellers sometimes overlap — a number of the people who have purchased items at Empire have also been pawners. Ideally, he says, "I want them to use our business to get through a rough patch, so that they can come back and buy something." Not everyone is so sanguine, though, about pawnbrokers’ inventories or the ethics of the trade. Amanda, the former drug addict who used to frequent pawnshops in times of desperation, says, "The item you see for sale is probably the last thing of value that someone owned; that’s why they pawned it. They got only a fraction of what it’s worth, and if they’re in bad shape, they won’t come back, and will never see it again."

Simple economic necessity brings people into pawnshops for a loan. Keithline notes that a number of his customers are single female heads of households. "These are people on the frontline, trying to help their families, and they’re not in a position where they can pick up the phone and call their parents when they need financial help," he says. Maria, a woman of about 50, is a regular customer at Empire Loan. On average, she comes in once a week to pawn jewelry. At any given time, she or her husband may need quick money for car repairs or other reasons. Maria has five children, the oldest being 32, the youngest 14. While she is hardly affluent, she is by no means down and out. The pawnshop functions for her more like an ATM than a last gasp shot for a few dollars. She sometimes redeems her pledge in as little as a few days, and is then back a short time later with something else to pawn. "Always the same jewelry, back and forth" she says.

Maria is typical in that she is a regular. Most pawnshop customers are repeat visitors: they’ve pawned before and will pawn again, regardless of whether previous items have been redeemed. The clients are thus somewhat stable in their instability. There are, of course, people who are completely desperate — addicts, drunks, transients, and various others. While pawnshops can make a quick buck by selling unredeemed pledges, their bread and butter is the habitual customer who keeps returning to pay interest, redeem loans, and pawn additional items. Some regulars come in year after year to pay the interest on a pawned item.

Not everyone who pawns stuff is struggling to get by, and not all loans are for small amounts. Reliable Jewelry & Loan makes loans against pledges of such big-ticket items as motorcycles and Jet Skis. A customer might come in after boating season, pawn an outboard motor, and then return to pick it up in the spring. Particularly for people with limited storage space or poor security, leaving an item with a pawnbroker may make sense beyond the immediate amount received as a loan. Reliable also occasionally writes pawn tickets for Realtors and car dealers who, on their way to an auction, might drop off a Rolex to have more cash. "Sit here long enough and you’ll see not only a homeless guy, but someone get out of a Mercedes as well," says Reliable Jewelry’s Anthony Flori. Empire’s Keithline notes that while many pawnshop customers are low-income, it’s not unheard of for a middle-class person who has suffered a job loss, or some other financial setback, to come in and pledge some diamonds to pay the private school tuition.

UNLIKE THEIR COUSINS in the instant-cash business, payday loan, and check-cashing operations, pawnshops have a long history. Pawnbrokers existed in China as many as 3000 years ago, as well as in ancient Greece and Rome. References to securing loans with personal property can also found in the Old Testament. As a formal institution, pawnbroking dates to 1198, when the Bavarian town of Freising established a municipal bank that loaned money against pledges. The use of the three pawn balls — the universal symbol of the pawnbroker — first came into common use in 18th-century Britain. The three balls apparently derive from the 15th-century Medici, the dominant banking family of the time, whose coat of arms featured three blue discs. The Lombard goldsmiths, the first major British moneylenders, popularized the symbol in England.

Pawnshops found their way to these shores before the advent of American independence. In the United States, the private pawnbroker has been the norm, but there is a long tradition of public pawnbrokers and charitable church-sponsored pawnshops. Although more common in Europe, public "remedial loan societies" have also been found in the US. The most notable is the Provident Loan Society of New York, a not-for-profit organization founded in 1893 by a number of New York City financiers and business leaders, including Cornelius Vanderbilt and J.P. Morgan. It still operates, serving 100,000 customers annually, accepting diamond and gold jewelry to guarantee loans.

While there are pawnbrokers throughout the US, the South and the Central Mountain states generally have more pawnshops per capita than the Northeast. According to Swarthmore’s John Caskey, this variation is primarily due to variances in pawnshop regulations. Some states, for example, have very high ceilings on pawnshop interest rates, and this, naturally, is a boon to owners and leads more people into the business. According to Rhode Island law, the maximum allowable monthly interest rate that a pawnshop can charge is five percent. This is low compared to many states, some of which allow rates of 20 percent per month, not including various additional fees, penalties, and charges. Alabama, with a little more than four times Rhode Island’s population, is host to nearly 450 pawnshops, 30 times the number in the Ocean State.

If there is one thread that unites Providence pawnbrokers Pamela Gizzarelli, Jeff Keithline, and Alex Martinez, it is the feeling that the pawnshop business has been unfairly maligned. All three regard the pawnbroker as provider of a legitimate service —instant cash loans — rather than as a predatory or exploitative enterprise. The National Pawnbrokers Association (NPA), not surprisingly, takes the same view. The Dallas-based NPA holds a yearly convention, has a legal defense fund, and publishes National Pawnbroker magazine, among other activities. The Web site (www.nationalpawnbrokers.org) features the current price of silver and gold, and offers a number of items for sale — including books, videos (the titles include Diamond Essentials and Motivating Your Staff), golf shirts, and CJ Bear, a stuffed animal named after one of the organization’s founders.

Having talked to several pawnbrokers, I can say that none of them appeared miserly, greedy, or wicked. Nor do they see themselves as exploiters of society’s most vulnerable. They may not be bad as individuals, but is the pawnshop business inherently unethical? Most pawnshop loans are for 90 days. Pawn a gold watch for $50 and it will cost $57.50 to get it back three months later. This doesn’t seem so bad until you realize that the interest rate on the loan amounts annually to 60 percent (this assumes the pawner returns when the loan is due). If not, there will be additional interest, storage, or insurance charges before the merchandise can be redeemed. Pawn loans go unpaid about a third of the time, allowing a pawnshop to keep a pledged item. This is bad news for the borrower, as the replacement cost of the pawned ring, guitar, or belt sander will be several times the amount of cash they received as a loan.

The economics of the business don’t favor the pawner, and they have little leverage in negotiating with the pawnbroker. Furthermore, customers tend to be much less financially sophisticated than pawnshop owners. Many do not understand how high the interest rates really are, and instead of focusing on the terms of repaying the loan, they usually look almost exclusively at the amount of cash they will receive for their goods.

But what’s the alternative? Jeff Keithline puts it like this: "Okay, it costs someone $15 to borrow a $100 for three months, but is that worse than them just selling their stuff to whoever will take it?" Most middle-class people are borrowing all the time with their various credit cards, even if only for convenience’s sake. But what if someone can’t obtain a credit card without putting down a cash reserve, or has defaulted on their payments? Furthermore, credit cards can’t be used for such things as rent, off-the-books services, or to satisfy a personal debt. The pawnshop is the natural outlet for the person who needs money in a hurry and can’t get it elsewhere. "We’re here for people who need us the most," says Alex Martinez of Providence Pawn. "Where are you going to go when you need a loan or you want to sell something right away?"

Pawnshops exist because banks don’t make loans to people with bad credit or no credit, or to those with few assets or guarantees of future income. The idea of a person on welfare or unemployment — or even one working in a low-wage job — walking into the Citizens Bank branch across the street from Reliable Jewelry & Loan, and seeking a $250 loan to make the rent or fix a transmission is fairly ridiculous.

Ellen Frank, senior economic analyst at the Poverty Institute at Rhode Island College, notes that changes in banking regulation have resulted in ever-larger financial institutions and the rapid decline of community-based banks. Many of these institutions were established, with significant government support, to help those of moderate income participate more fully in the economy. According to Frank, however, "In the 1980s, a lot of low-income people lost their banks, and check-cashing and payday loan outlets filled the breach." These operations, like pawnshops, serve as fringe banks — providing some of the services of traditional banks, but charging heavily to do so, finding their customers in those shut out of the world of mainstream financial institutions.

JEFF KEITHLINE notes that there is no such thing as bad credit in the pawn business. The pawned item is the security, and if the loan is not repaid, the pawner remains welcome to come back and put up something else to guarantee their next loan. It might be harsh, but the pawner knows what they are facing.

This is somewhat different from credit card companies that aggressively hawk cards with low introductory rates, and then raise these after six months to annual rates of 20 percent or more. Or furniture stores that proclaim no money down, no payments for 12 months, and so on, and then, at the first late payment, hit the purchaser with an avalanche of finance charges and late fees. Pawnshops seek your business with the flashing neon sign and the three balls logo, but credit card companies are much more aggressive, enticing customers to borrow with direct mail campaigns that promise all kinds of goodies. Extricating yourself from the balance on a passel of department store and bank credit cards is not like walking away from the pawned guitar or Cartier watch. Personal bankruptcy remains on someone’s credit record for seven years, and once you have bad credit, the interest rates for a car loan or mortgage are murderous.

In many ways, the person who pawns their gold ring or big-screen TV is a throwback. They are backing a loan with collateral. The middle-class person does no such thing — they finance the vacation, holiday spending, or new living room set with plastic, on the expectation they will earn the money to repay the amount borrowed. Not nearly everyone does, as the record current rate of personal bankruptcies attests. As Keithline puts it, "Everyone spends more than they make — the people of modest means are no different than the middle class." For people at the low end of the economic spectrum, the difference is that the pawnshop may be the only [legal] avenue to obtain the $150 needed to pay the rent. "This is the whole American thing right here" Keithline says, spreading his arms to indicate Empire Loan and the city surrounding it.

Tim Lehnert can be reached at timlehnert@ids.net