Missed posting this last week. From the NYTImesDealbook, “Platinum Card & Text Alert Via Pawnshop”:
Linda Ballard, 61, uses the word “love” to describe her banking relationship, lauding the ease of cashing her bimonthly paycheck, the convenience of text alerts about her balance and the features on the platinum card that she was upgraded to in July.
But she is not getting all this from a bank. She is getting this array of services from a pawnshop — part of an industry that has long had a reputation of taking advantage of vulnerable customers handing over prized possessions in exchange for cash.
As banks zero in on more affluent customers who promise twice the revenue of their lower-income counterparts, close branches in poor areas and remain stingy with credit, pawnshops are revamping their image and stepping into the void to offer financial services….
There are, however, plenty of potential drawbacks, consumer advocates say.
Some loans from pawnshops can come with interest rates as high as 25 percent. And fringe financial operations, the consumer advocates say, can imperil lower-income customers’ ability to save for the future. Without a traditional checking or savings account, borrowers often pay more for basic financial transactions like cashing checks, paying bills and wiring money, financial counselors say. And because pawnshops do not seek or report matters affecting credit scores, pawnshop banking makes it hard for customers to build credit history…
The basic business of pawnshops is, of course, a financial service. If a man walks in and hands over, say, a watch, the shop will lend him money based on a percentage of the item’s value. The customer has a set period of time to pay that back, usually one to four months. If he pays it back in time, and pays the interest, he gets the item back. If he does not, the pawnshop sells the item.
Pawn loans are so profitable simply because of the high interest rates pawnshops can charge. Interest rates vary by state and range from 2.5 percent to 25 percent a month, the industry group the National Pawnbrokers Association estimates. So a 30-day loan on a $150 item would give a pawnshop a profit of up to $37.50, while a four-month loan could mean a profit of $150. Pawnshops may also charge fees for things like storage and lost tickets.
Yet for many customers who have been denied credit because of checkered financial histories, an instant loan from a pawnshop can feel like something of a miracle — at least at first — consumer advocates say….