Pawnbroking: The Hot New (Ancient) Credit Market
Thanks for having me back at Credit Slips! This week I’ll be blogging about two forms of credit that are increasingly popular: auto title lending and pawnshops.
Pawnbroking is back, and in a big way. Recent television shows like Pawn Stars and Hardcore Pawn are a testament to the resurging interest in this ancient form of lending. In a new paper with Susan Payne Carter and Marieke Bos, "The Pawn Industry and Its Customers: The United States and Europe,"we document important facts about the pawn business. Pawnbrokers take collateral or a “pledge,” (anything from jewelry to tools to dental implants!) in exchange for about 50 percent of the item’s resale value, plus interest.
In a follow-up paper published in The Review of Financial and Banking Law, Professor Carter and I show how pawnshops can function quite well in light of the behavioral economics factors driving behavior. Borrowers who pawn items like wedding rings are especially inclined to retrieve their collateral; the sentimentality of their pledge apparently functioning as an efficient commitment device, thwarting off the potential feeling of loss associated with forfeiture of your personal property. (Try to explain to your wife where your wedding ring went!) This type of behavior is fertile ground for examining the nuances of alternative borrowing behavior.
In general, so little is known about how pawnshops are used that our main goal is to learn whether pawn credit helps or harms consumers who often have no other options. Marieke Bos’ shows people turn to pawnshops quite rationally. For example, borrowers are more likely than the general population to have low credit scores and to have already exhausted their other credit options. For more on the rationality of pawn borrowers. (See "Rationality in the Consumer Credit Market: Choosing between Alternative and Mainstream Credit").
Once the scourge of the lending world, pawnshops serve seven million Americans a year. Pawnbroking helps borrowers manage their personal finances in a way that wouldn’t be possible with traditional credit options alone.