04 Jul 2013

 

Pawnbroking is one of the oldest professions and forms of lending, having been around for over 3,000 years. While pawn brokers sometimes help (and sometimes rip off) poor people who don’t have access to other forms of credit, another useful thing they do for the economy is to act as an economic barometer.

 

One way to tell how an economy is going is by looking at how well pawnbrokers are doing. Even former RBA governor Bernie Fraser has said there is a likely correlation between the increase of the use of pawnbrokers and a tough economy. Pawnbrokers are basically recession proof organisations.

 

For example, in the past six months Cash Converters has had its personal loan book increase by 25%. Their cash-advance business has increased by 7.1% to $126.5 million loaned and the number of customers increased by 16% and store sales grew by 6.5%. This has been reflected by the performance of Cash Converters shares, which have increased by 71% in the past 12 months, compared to a 48% increase in the S&P/ASX 200 Retailing Index.

 

While the national unemployment rate is 5.5% as of May 2013, there are some regions such as Bankstown in Sydney’s western suburbs where the level is at 14.0%. Suburbs such as Bankstown are typically where pawn brokers like Cash Convertors are located, and where they make most of their profits from.

 

The average loan from pawnbrokers is approximately $100. This amount is too small for applying for a personal loan or credit card (if the criteria could even be met). Timing is also important as people who use the pawnbroker need the money immediately and cannot wait for a bank to process a loan. The maximum advance of a loan is usually about half the second-hand resale value of the item.

 

Interest is usually charged monthly, at a rate set by the pawnbroker, which is normally around 20%, so when these loans are repaid pawnbrokers make enormous profits off some of society’s poorest and most vulnerable members.

 

One of the reasons why pawnbrokers have been so successful over thousands of years is that can rely on two different businesses. When the economy is doing well people will use the retail/selling part of the business and if the economy is bad the pawn shop will do well making high interest loans.

 

So what can we learn about pawnbrokers? When the pawnbroker shop line is long the economy is bad, and when the line is short the economy is good. Hopefully we don’t see those lines get any longer any time soon.

By burningpants // Banking & Finance

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