I find it interesting, all of the consumer protection groups that are rallying behind certain members of Congress, pressing them to pass some form of federal APR rate cap for all consumer credit transactions in the US. While the efforts of these consumer groups may be considered laudable, as well as the efforts of Congress, their actions could prove to be downright dangerous to the very consumers they are attempting to protect.
The reason I say this is because I know these consumers closely and personally, having been a pawnbroker for over 30 years. I also admit I have experienced first-hand what their short-term credit crisis feels like having had to turn to the pawn industry earlier in my life on several occasions to provide some much-needed short-term credit for my own financial dilemmas. While I cannot speak on the effects such a federal APR rate cap would have on other forms of short-term credit currently available in the US, I can offer my point of view on the effect this would have on the pawnbroking industry in the US and the millions of customers it provides credit to.
From my own experience, roughly half of these current pawnshop consumers would end up paying additional charges to their banks through none sufficient funds fees and overdraft protection fees amounting to an APR that would make any pawnbroker blush. The other half of these current pawnshop consumers would end up turning to unlicensed unregulated (and presumably unsavory) short-term lending alternatives because they do not have any formal banking relationship. This is because the pawnbroking industry as we know it in the US cannot and will not survive with any of the federal APR rate caps proposed. Here’s a simple example of why.
In my pawnbroking career the average dollar amount on the pawn loans I have written are roughly $100 each. The average length of time my typical customer takes to pay this $100 loan back is roughly 45 days. Because I charged 15% finance charge per month, this translates to a $122.50 loan payoff for the average size loan paid off in the average amount of time. Far less expensive for the consumer than what they would be charged for an NSF check, an automatic overdraft protection fee, a reconnect fee for a utility, or missed payment on their credit card.
But here’s the big thing. This $100 loan obtained by the consumer at my pawnshop is secured by collateral. Some form of personal property the customer decides to pledge. This personal property is the only form of recourse I have if the customer chooses not to repay the loan. That’s right, I said chooses. By giving them a choice am I actually creating debt for them?
Pawnbroking is the only form of consumer credit where the borrower actually has a choice on whether they wish to repay their loan or not. Of course, if they choose not to repay the loan within the amount of time disclosed on their pawn ticket, their loan goes into default and the pawnbroker now owns the pledged personal property and will dispose of it. But there is no additional recourse or consequences imposed on the nonpaying borrower. No lawsuits, no bad credit reporting, and no additional debt in their lives. They simply forfeit the property.
You may be wondering why the pawnbroking industry could not survive this proposed federal APR rate cap. The most generous proposal currently in Congress calls for a 36% APR cap. While this may appear as overly generous for any type of conventional lending, this methodology cannot be equally applied to the pawnbroking industry. Now if you take my typical $100 loan with the average 45 day payoff the customer would pay back $104.50. Hardly as generous as you would like to believe, and hardly sustainable for anyone in the pawnbroking industry.
I understand it may sound appalling to you that I write loans with a 180% APR disclosed on the pawn ticket, and because of this you may consider me no better than a usurious loan shark. But you’re thinking would be flawed and actual pawnshop customers understand this. Pawnshop loans are short-term, much like your average hotel stay. You probably do not give second thought to staying in a hotel with a $100 room rate per night. You certainly wouldn’t think the hotel is exploiting its poor customers by charging them $36,500 in annual rent. Would you? I think not.