Pawn shops are beckoning from the shadows.
At a time when banks have shut their doors on those with bad credit, a growing number of borrowers are pawning their jewelry, electronics and other valuables to make ends meet.
Consumer advocates say the development is concerning because the interest rates on loans from pawn shops can be as high as 20 percent a month. But pawn shop operators say they provide a critical lifeline to a group with few other options.
"It's a short-term loan _ it's designed to bail someone out and be done with it," said Ed Bean, who owns Suffolk Jewelry & Pawnbrokers in Boston.
A common misconception is that pawn shops simply buy the various knickknacks that customers bring in. But the more lucrative aspect of the industry is issuing loans against those belongings. Customers often prefer borrowing over selling as well because it lets them hold onto what may be their only tickets to cash in the future.
What's key about loans from pawn shops is the lack of judgment; a credit check isn't required and they don't have an impact on credit scores. The transaction takes just a few minutes in many cases.
A pawn shop owner simply eyeballs the merchandise a customer brings in and offers a loan amount on the spot. If the customer repays the loan within 30 days, the belongings can be reclaimed. The customer can also opt to extend the loan; many borrow against the same items over and over.
If a customer fails to repay the loan, the shop can put the collateral up for sale.
The National Pawnbrokers Association says its members are reporting record growth as a result of persistently high unemployment, coupled with soaring gold and metal prices. The group says the popularity of the shows "Hardcore Pawn" on truTV and "Pawn Stars" on the History Channel are opening up the industry to a broader customer base as well.
Although the vast majority pawn shops are independently owned, the latest quarterly profits at the three publicly traded pawn store operators reflect the growth the industry is enjoying. Cash America International Inc., Ezcorp Inc. and First Cash Financial Services Inc. each reported net incomes that were up at least 25 percent from a year ago, helped by rising demand for loans.
"The opportunities for short-term cash have dried up," said Eric Fosse, who heads North American operations for Ezcorp, based in Austin, Texas. "Banks have basically abandoned our customer base and their neighborhoods."
Since the start of the downturn, banks and credit card companies have moved to reduce risk and maximize profits by stepping up their courtship of big spenders with sparkling credit. According to the latest data from credit reporting agency TransUnion, the bulk of credit card offers are still going to those with a credit score of at least 700.
Such economic conditions are pushing more borrowers into the position where their only options are loans from pawn shops, Fosse said.
The average amount of a pawn loan has nearly doubled to $150 since the downturn began. That's partly because a spike in precious metal prices means gold jewelry is fetching higher prices. But it also speaks to the changing customer base, said Emmett Murphy, a spokesman for the National Pawnbrokers Association, based in Keller, Texas.
That shift toward the mainstream is also the spin behind Pawngo.com, which launched this summer with funding from the founders of Groupon. The site is targeting a more middle-class customer base and has made about $3 million in loans since June. Founder Todd Hillis says the average loan amount is $2,000.
Rather than haggling at the counter of a pawn shop, the site's customers fill out an online form describing the items they want to pawn (including a picture is optional) and receive an email offer for a loan amount. If they accept, they print a FedEx shipping label and overnight mail the items free of charge. Once the items are received and validated, the loan amount is deposited into the customer's bank account.
Reflecting the economy's impact even on upper-income customers, Hillis said customers are mailing in luxury jewelry collections and Louis Vuitton purses.
"It's not your typical brick and mortar pawn shop where they're taking in home electronics and video game systems," he said.
The interest rates are also on the lower end of the industry at between 3 to 6 percent a month. But the costs still add up. Pawngo loans come in three-month installments, so on a $2,000 loan, customers would pay back $2,360 after three months.
The interest rates pawn shops can charge vary widely depending on the state. In New York City, where the industry trades primarily on jewelry and loans tend to be larger, the cap is 4 percent a month. In the South, where loans tend to be smaller with many customers bringing in items such as power tools or lawn mowers, caps can be as high as 20 percent. Fees for storage could also apply in some regions.
Such costs are why pawn shops should be considered a last resort, according to Jean Anne Fox, director of financial services at Consumer Federation of America in Washington, D.C.
Loans from pawn shops can also hook users into a cycle of debt because those living on tight means are prone to extending loans if their financial situations don't improve. The risk is not as high as with other types of loans, however, since pawn loans tend to be smaller and are easier to repay, she said.
Loans from pawn shops are also more merciful because they don't trigger a sequence of financial repercussions, Fox notes.
"It's a form of high-cost credit," she said. "But if you don't repay the loan, you surrender the item and the transaction is over."
Even though going to a pawn shop may seem expensive to those with good credit, Bean of Suffolk Jewelry & Pawnbrokers in Boston also notes it's a way for many to keep the lights on at home.
"It's still the business that it is, and it can't be picture perfect," Bean said. "We're not a genteel jewelry shop. But people can come in and expect that it will be efficient and we will be polite."
Candice Choi can be reached at www.twitter.com/candicechoi.