Pawnbrokers Thrive in Recession

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One thing the financial crisis has taught us is that banks fail, and even the ones that are bailed out are plenty capable of losing people’s money. When this happens, pawn shops often step in to fill the need for short-term loans and cash for nearly anything with resale value.

There are three national pawn shops on the stock market in the U.S., and all of them have seen their share prices soar as the Great Recession and unemployment mean more people are seeking short-term cash.

In the past year, share prices have increased drastically for pawn shops: 33% for First Cash Financial Services (Stock Quote: FCFS), 110% for Cash America International (Stock Quote: CSH) and 81% for EZCORP (Stock Quote: EZPW), which benefited thanks to expansion into Mexico and Canada.

By its very nature, the pawn shop is a very local entity. Most pawn shops provide 30- to 90-day loans at around 20% interest using property as collateral. If the person does not return to claim the collateral they borrowed against, the store sells it to recoup the amount of the loan, plus whatever profit they can make on top of that.

Pawn shops’ fortunes are often linked to the price of gold and other precious metals, which are also experiencing record highs. Pretty much everyone has jewelry, and pawn shops are suckers for guaranteed returns. The price of an ounce of gold has increased 28% in the past year, to $1,135, so even an old ring has a guaranteed value based on how much gold is in it.

On the lending side of pawnbroker operations, pawn shops are regulated much like banks. While different states have different regulations, pawn shops often have a cap imposed on the amount of interest they can charge, so as not to take advantage of desperate customers. They are also forced to report all purchases to police to ensure that no stolen goods are being sold in the shop.

Despite these regulations, though, pawn shops are most definitely not in the banking mainstream. For example, they are not required to report when customers fail to retrieve their collateral, which is equivalent to defaulting on a loan in a banking setting. This protects pawners´credit ratings and can help get repeat business.

Pawnbrokers have been around forever, as many shops are proud to remind their customers, and with a recession-friendly business plan, they seem poised to weather any economic storm to come.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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