As stricter regulation keeps being released, payday lenders have been investing more in their pawn operations. Pawn shops allow people who are strapped for cash to swap jewelry, music systems, electronic gadgets, and other items for cash. Some of these lenders include Ezcorp Inc, Fast Cash Financial Services Inc, and Cash America International. These companies have seen their payday loan profits significantly decrease, while their pawn operations have increased.
When compared to payday loans, which sometimes hold interest rates over 300 percent, pawn loans are less expensive and do not need to be repaid if the borrower forfeits the collateral.
“The pawn transaction is a very simple, no-questions-asked secured loan that’s working very well for people,” Sterne Agee analyst Henry Coffey said. According to Coffery these companies are pouring capital and managerial resources into their pawn products, which are growing at a rate that hasn’t been see in the past 10 years.
States like Ohio have cracked down on payday lenders putting a cap on their interest rates of 28%. Because of this companies like Cash America, who closed 42 stores in Ohio, have been suffering. Payday loan companies argue that while 28% may sound like a lot of money, most of these loans are paid off in two weeks. If someone were to borrow $500 and pay it back in two weeks the payday loan company would only make $5.38. Payday lenders say this isn’t enough money for them to make to pay their bills, or even cover the amount of loans that end up going into collections due to the higher risk.
The payday lending sector is also expected to face resistance from President Barack Obama, who during his campaign called for interest rate caps and improved disclosure.
Companies like First Cash said that they now expect that 75 percent to 80 percent of its earnings for 2009 to come from pawn operations. Many of these companies have also expanded their operations to Mexico where the demand for such loans is high.
First Cash expects to open 55 to 60 new stores in Mexico and a limited number of new pawn stores in the United States this year, while Ezcorp plans to open 30 to 35 pawn shops in Mexico.
Cash America said in September it planned to buy an 80 percent ownership stake in 100 pawnshops in Mexico for about $90 million.
To read more about pawn shops cashing in head on over to Reuters.