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.
Interesting post, Paige. A couple years ago, one of my seminar students visited every pawn shop in Albuquerque to write a paper about how they function, what they pay, etc. Due initially to Native American concerns, our laws cap interest on pawn loans at 48% per annum, interesting given the lack of caps in any other form of lending in New Mexico. What Jessica (Randall) learned was that in our town, pawn shops specialize. One might have mostly jewelry, another western riding gear, another firearms, and so on. She walked away from the research with a very favorable view of pawn transactions, particularly when compared to title loans and payday loans.
Posted by: Nathalie Martin | February 26, 2013 at 06:30 PM
Thanks Nathalie,
I'd love to see any other research on pawnshops. There isn't much out there!
Posted by: Paige Marta Skiba | February 26, 2013 at 06:37 PM