‘I didn’t know you were legit’

Les Gold, the Hardcare Pawn guy, is promoting his new book, so he’s all over the interview shows this week. Here, on Fox Business News, he explains that the bankruptcy of Detroit is not good news for his pawn business there.

Our Maui pawn business is no different. Here at Kamaaina Loan blog, we keep trying to debunk common, but wrong, opinions about the business.

The Fox interviewer assumed that most pawn customers are desperate. That’s not true.

Besides, nobody,  but nobody wants to do business with people who are going to have no income. Not Les, not us.

Now, it is true that a fraction of a pawnshop’s customers are selling or borrowing on their last assets, and they are one step from destitution.

And pawn shops do do business with those people, helping stave off the wolf for another few days. What other business would touch them? Not one.

But while that is something pawnbrokers do, it is not how they prosper.

They — and we on Maui — do well when borrowers redeem their collateral.

It’s true that a pawn loan is somewhat less insecure than any other loan. The lender has his collateral already, unlike a mortgage lender, who, if the loan is not repaid, has to shell out money to start foreclosure, then sell the property and hope the return covers the balance. (Something that, as we all know, frequently did not happen since the Crash of ’08.)

The pawnbroker’s security is in house, but, as Les Gold explains, it costs him money to store and insure it, and if he forecloses on it, he still has the expense and trouble to trying to sell it. Since it is used goods, he will have to offer a bargain price.

It’s a system that works, but not perfectly.

People find it hard to believe, but a pawnbroker would always rather have the loan repaid. Then he gets his principal back with interest. If all has gone well, the customer is pleased with him and may come back to make a new loan sometime.

Contrast that with a pawn loan to someone with no further assets. The pawnbroker loses his principal and gets no interest. He may or may not be able to recover that by selling the collateral. And the customer may not be happy to have lost his (ring, surfboard, computer etc.)

(The pawnbroker will have an easier time, usually, if the collateral is gold or silver. Unless the price of precious metals has gone down during the 60 days he has been required by law to hold the item. This has been the case lately, as gold has dropped by hundreds of dollars per ounce. There ain’t no free lunch.)

Besides, the customer’s broke and out of assets, so he won’t be a repeat customer anyway.

Gold says redemption rates at his pawnshop and across the country average 90%. That might be a little optimistic over the long run, although redemptionr rates have been up in recent years. But 80% is a solid number year in and year out for most pawnshops.

And, remember, there is a fraction of borrowers who are getting rid of something they no longer care to have. They could just sell it outright, but sometimes they aren’t sure. So they pawn it, and when it comes time to reclaim it, they decide — even if they have the money to do so — that they don’t want it.

Call it values clarification.

The Fox interviewer is surprised by all this. “I didn’t know you were legit,” he tells Gold.