Pawnshop Growth Reflects Economic Conditions

Article excerpt

If you think banks, savings and loans, credit unions and finance companies are the only sources of credit in Oklahoma, think again.

Pawnshops play an important role in consumer finance, especially for consumers on the lower rungs of the economic ladder, according to a study published in the Federal Reserve Bank of Kansas City's Economic Review.

Oklahoma, with 369 pawnshops in 1988, had more pawnshops per million people - 113.1 - than any other state, and the number grew to 383 pawnshops during 1989, according to Prett Cowley, administrator of the Oklahoma Department of Consumer Credit.

That dubious honor reflects economic conditions in the state since oil prices tumbled in 1982, according to John McClure, deputy administrator of the department.

"It provides a source for people who used to be able to borrow from Oklahoma's banks and savings and loans and credit unions, but can't any longer," McClure said. "It allows them, when the need arises, to come up with small amounts of cash to get them through."

Most pawnshop customers have high credit risk, denying them the ability to borrow on an unsecured basis, and need small loans - the average pawnshop loan in Oklahoma was $41 in 1987 - that traditional lenders don't make, the study said.

"You've got to remember, in most cases, the people who use pawnshops do not qualify for lenders," McClure said.

Some people have used the same pawnbrokers for years "that's their lender, their financial source," McClure said, because they are on a fixed income that wouldn't allow them to borrow from traditional sources. Between 70 and 80 percent of pawnshop customers return, the study said.

"They don't have to prove that they don't need the money to get the loan," McClure said, referring to bank lending procedures.

But customers pay a hefty interest rate for using a pawnshop.

Oklahoma pawnshops charge one of the highest rates in the country, charging interest rates of 240 percent on a two-month $51 loan, according to the Kansas City Fed study.

Some of the other states studied allow pawnshops to charge up to $5 in storage and insurance fees, but their overall interest rate on a two-month $51 loan was less than 95 percent, with New Jersey and Pennsylvania having overall interest rates of 36 percent. More than half of the states allow pawnshops to charge overall interest rates of more than 120 percent, the study said.

While New Jersey and Indiana have a legal monthly interest rate of 3 percent, Pennsylvania's rate is 0.5 percent and Oregon's rate is 3.9 percent, Oklahoma's is 20 percent of the first $150 borrowed, as set by the Oklahoma Legislature.

The rule of thumb in lending is the riskier the borrower, the higher interest rate they pay on loaned money. Oklahoma's default rate on the number of pawnshop loans is 22.2 percent, compared to 20.6 percent of the pawnshop loans made in Indiana, where the interest rate of 71.3 percent is much lower than Oklahoma's 240 percent. Oregon's pawnshop loan default rate was 13.9 percent, and its interest rate is 94.8 percent. The default rate based on the value of loans made by Oklahoma pawnshops was 19.6 percent, compared to 13.8 percent in Indiana and 9.3 percent in Oregon.

The higher interest rate hurts the consumer, Cowley said. When a pawnshop customer needs money to cover an emergency, they don't consider the interest rate on a loan, he said. …