VOL. 124 | NO. 1 | Friday, January 2, 2009
Pawnshops Clients Today are Driving BMWs
By GARY FIELDS | The Wall Street Journal
PHILADELPHIA - At Society Hill Loan, a pawnshop in a middle-class neighborhood here, a steady rain fell outside as a fashionably dressed young man parked his Cadillac Escalade outside. Looking around warily, he came in to speak with Nat Leonard, co-owner of the store.
The visitor was a 29-year-old engineer who was laid off earlier this year from one of the local chemical companies. Since then, he's been cleaning planes at the airport for less than half the salary he was earning a year ago.
Now he needs a $2,500 loan on his watch – a Movado Fiero with a diamond bezel – to pay his mortgage note.
"I want to help," said Mr. Leonard. But unlike Rolex and a few other brands, "there's no market" for Movado in his pawn universe.
The young man, who didn't wish to give his name, left the store disappointed. "I'm not sure what I'm going to do," he said.
Typically, pawnshop customers have a household income of about $29,000, according to Dave Adelman, president of the 2,400-member National Pawnbrokers Association. But operators around the country say they are seeing a surge in new activity fueled in part by a different clientele: middle- and upper-middle-class customers facing ravaged stock portfolios, tightened bank credit and unexpected layoffs. In areas dogged by high unemployment and foreclosure rates, the pawn business is especially robust.
Rick LaChappelle, owner of four pawnshops in Maine, calculates he has lent about 33 percent more money this year than last. "The banking industry is not giving out any money right now," he said. "So people are relying on second-tier lending institutions."
While some pawnshops – like Beverly Loan Co. in Beverly Hills – have discreetly served the wealthy for decades, more stores, such as Society Hill, are newly awash with furs, diamonds and other baubles from the bubble. At places like Society Hill, transactions are up by as much as 40 percent in recent months.
Even Beverly Loan has seen a shift in customer patterns. "We have had so many $50,000-plus loans and more businesses [as clients] than ever before," said Chief Executive Officer Jordan Tabach-Bank. Many business clients, he said, are "getting loans to meet payroll or other obligations because their lines of credit are frozen."
Pawnshops are lending companies that take collateralized or pawned merchandise in exchange for money. If a customer defaults, or fails to pick up their belongings, then the shop can sell the goods. Though fees vary from state to state and are set by law, the cost of a typical $75 loan is about $15 a month. While total fees can pile up over a period of several months, the industry argues that its rates can be lower than some high-interest credit cards and bank fees.
Lee Amberg, owner of AA Classic Windy City Jewelry & Loan in affluent Evanston, Ill., said he's been seeing Cartier watches, two-carat diamonds, David Yurman jewelry and pieces from Tiffany's. One client, he said, brought in a fur coat from Saks Fifth Avenue that retailed at $9,000. She told him she needed a loan to help buy private-school uniforms for her child.
Diamond Exchange USA is more of a hybrid store. In addition to selling its own pieces, it makes loans against customers' goods and purchases used jewelry too. Located on a major thoroughfare in Bethesda, Md., it has a constant stream of Mercedes-Benzes, BMWs and other luxury cars pulling into the lot. Virtually all of the clientele are women. Many come to sell their gold or diamond jewelry.
A potential new customer recently strolled in to speak with co-owner Justin Carmody. A resident of Potomac, Md., she owns a small wholesale company and was looking to obtain a $6,000 loan on a 1.91-carat diamond ring given to her by her husband. With a 10 percent fee, she learned, it would cost her $6,600 to get the ring back. If she failed to resolve her cash issues in a month, she'd be responsible for an additional payment – $600, or 10 percent of the principal – each month until satisfying the debt.
"I've never done anything like this. I'm looking at my options," she said. "I'm trying to separate my emotions. I just want to get through the next week." Ultimately, however, she decided against the loan.
This year, the number of first-time pawnshop users is up 10 percent, according to Mr. Adelman of the pawnbroker trade group. Owners say the rate at which people are coming back to retrieve property and pay off loans has fallen about 10 percent. That leaves the store on the hook to sell the goods.
Though some pawnbrokers now have more items to sell – the result of higher loan defaults – their general prospects remain healthy. Richard Shane, managing director at Jefferies & Co., who covers the pawnshop industry, said publicly traded companies, such as Cash America International Inc., are doing well in this difficult economy. (Pawn balances at the company rose by 16 percent in the quarter ended Sept. 30.) Banks, moreover, continue to make funds available to them "because the businesses are strong and cash flow is strong," said Mr. Shane.
On a recent weekday morning, a line stretched from the front counter at Lewiston Pawn Shop. Mr. LaChappelle and his Lewiston, Maine, staff turned away many customers with less-than-desirable goods. Computers, because they become obsolete so quickly, are among the items that are hard to use as collateral. Other things such as porcelain figurines and collectibles have negligible loan value since there's a limited market to resell them if necessary.
"I try to take all I can but I also have to be aware of the market," explained Mr. LaChappelle. "We have to evolve with the economy or I get stuck with merchandise that doesn't sell."
At the 10-floor gallery, an out-of-work contractor named Albert Langlois walked the aisles pointing to construction equipment he has pawned as collateral for loans.
Included in the stash: industrial-size nail guns, drills, air compressors for running power tools and several saws. The scaffolding he uses to work on multi-story buildings is stacked in a storage room. "Pretty much everything I own is in here," Mr. Langlois said.
So far this year, Mr. Langlois, 40, has laid off the eight members of his contracting crew and lost a house through foreclosure. In addition to his equipment he has pawned two motorcycles, valued at $20,000 between them. Mr. LaChappelle has become one of the primary lenders around, Mr. Langlois said. "You can't go to a bank and get small loans to make ends meet, so you come to Rick."
Derek Arthur, 27, owner of Ground Up Construction, was returning to the store to recover his equipment after satisfying a loan. A year ago, he said, he had 20 people working for him, including subcontractors. Now he has four employees and just one job. He had needed a $3,000 loan to get the business through a rough period while awaiting payment from a customer.
Mr. Arthur figured no bank would lend him such a small amount for a month or two. So he pawned a dump trailer as well as other equipment and a smattering of jewelry. The money, he said, paid his work crew, insurance and other expenses.
"You have to have a Plan B," he said. "If you don't have one, you'd better find one fast."
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