Financial Troubles: Pawnbrokers cash in on need for short-term money supply

Pay-DAY lenders have hit the headlines in recent weeks as the squeeze on household incomes forces consumers to find new ways of easing cash worries.

But they aren’t alone in cashing in on the quest for short-term money boosters. Pawnbrokers and other “asset lenders” have experienced a resurgence in demand since the financial crisis began unfolding some four years ago, and with disposable incomes under growing pressure, their revival has legs in it yet.

The Money Shop, one of the UK’s biggest pawnbroking chain, last month revealed that it is adding 12 new stores to the 20 it already operates in Scotland. It revealed particular demand for short-term loans, with eight in ten people coming back for their pawned possessions at a later date.

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But while pawnbroking can evoke grubby Dickensian images of dark rooms and under-the-counter deals, it is also a world now in which Rolexes, cars and high art are used as collateral by people seeking short-term cash.

Online lenders allowing anonymity are especially benefiting. Borro.com, which calls itself a “personal asset lender” that uses the basic pawnbroker model, saw a threefold increase last year in the number of customers borrowing against their own assets, with collateral including Fender guitars and a Henry Moore sculpture.

It targets borrowers higher up the income scale than the traditional pawnbroker, with the average Scottish customer borrowing £4,600 in the year to date. The typical loan is in the region of £100 on the high street, yet the average loan value at borro is expected to hit £5,000 this year as it attracts more mainstream borrowers no longer able or willing to use traditional credit sources.

Paul Aitken, chief executive of borro, said: “Many people are realising that they have invested in a range of valuable personal assets which they can use to raise funds. They use our service because there are no credit checks, lengthy bank processes or putting property up as a guarantee.

“The majority of our customers come back and redeem their assets demonstrating the risk free and efficient service we provide.”

Part of the appeal is its simplicity. If a pawnbroker accepts the item(s) against which you want borrow money it will usually lend you around 35 to 40 per cent of the value and hold on to it for a set term, usually a month or six months. You get your item(s) back if you repay the loan and interest within the set period; if you don’t, they are sold off unless you reach a fresh agreement with the broker.

Duncanson & Edwards, the oldest pawnbroker in Edinburgh, lends on anything from diamond rings, watches and gold bullion to electrical goods and musical instruments, although it claims to consider anything of value.

The company, which has been in business for more than 180 years, keeps items for up to seven months, with borrowers able to reclaim possessions at any time in that period if they repay the loan and interest in full. The interest is charged monthly, with no additional fees.

Only if the borrower is unable to repay the loan do they relinquish ownership of the item.

In some 80 per cent of cases the owners reclaim their item(s) from the pawnbroker, according to Bristol University Personal Finance Research. As Aitken pointed out, the ease of access to cash compares with the increasingly stringent credit checks and application processes that financial institutions now put many borrowers through.

Given the option of getting involved in a process that could take time and end in failure – with the credit record damage that can entail – more people are finding alternative ways of getting short-term cash. The same factor is helping drive the sharp rise in the use of payday loans, which are no longer the exclusive preserve of the penniless and desperate.

Pawnbrokers offer a (possibly dubious) flexibility too, with most prepared to lend against anything from fine art and vintage cars to Rolexes and gold.

What Aitken doesn’t mention is that borro’s online presence helps remove the stigma attached to pawnshops by allowing people to sell their possessions anonymously rather than be seen hawking them on the high street.

At a time when the number of middle and high-income Scots going bust is rising rapidly, it’s no surprise that people who may previously have earned big money or enjoyed generous credit card limits are selling their belongings to raise cash.

Pawnbrokers have also been boosted by rising metal prices. The price of gold has leapt from around £350 per ounce to some £1,100 in the space of just five years and has driven a surge in the number of people cashing in gold jewellery and other items.

Tesco spotted the potential last year, launching a gold exchange online and in several stores. The service allows customers to apply for a gold pack including a special delivery bag in which they can place unwanted or damaged jewellery and then send off via the Post Office or a participating Tesco Extra store.

Within three working days the items are valued and the customer quoted a price based on carat, weight and current market rate. The price offered currently averages just over £350. If they accept, the money is paid directly into their account.

So how much does it cost? Borro typically charges around 4.5 per cent a month, though the rate depends on the size of the loan. For example, loans less than £10,000 attract an interest charge of 4.99 per cent a month – equating to an APR of 68.8 per cent – falling to 3.99 per cent a month on loans between £10,000 and £99,999 (53.6 per cent APR). Interest is charged at 2.99 per cent on loans of £100,000 and more (39.1 per cent APR). However, there are no charges for set up or repaying the loan early.

In another example, a borrower using pawnbrokeronline.co.uk to secure a three-month £500 loan against a watch would pay monthly interest of 5 per cent, taking the repayment to £575 and equating to an annual percentage rate of 69 per cent.

The parallel rise in demand for pay-day loans and pawnbrokers is unsurprising in an economic climate in which disposable incomes are being squeezed. Their flexibility and the ease of obtaining short-term cash make them attractive to those in financial difficulties.

Yet with potentially huge charges borrowers have to tread carefully and go into transactions with eyes wide open and having investigated all the alternatives, such as high street lenders and credit unions.

There are also concerns that some people turning to pawnbrokers are merely delaying the inevitable. Trisha McAuley, deputy director at Consumer Focus Scotland, urged those tempted to use pay-day loans or pawnbrokers to seek advice and understand what other options are open to them.

“These are tough times for people in Scotland and, sadly, we all know that many household budgets are under pressure,” she said. “Neither pawnbrokers or pay-day loans offer value for consumers and actually penalise the poor.”

The Society of Professional Mortgage Arrears Counsellors warned in a recent newsletter that a growing number of people falling behind on their mortgages are pawning their possessions to keep their debts under control.

It said: “The money is often being used for normal expenditure, and when used for mortgage payments this way of covering shortfalls can only last until such items are all sold. If, as expected, any recovery is delayed, there will be a new sector of arrears problems.”