When Mike Walsh needs cash for his homebuilding business, he borrows it from his Rolex watch.
"My bank cut my line of credit, but I still needed to float my business expenses," Walsh says. "I have a lot of valuable items, but can't get a loan against them."
In order to get the operating cash he needs, Walsh has turned to pawning -- and he doesn't even have to head to the seedy side of town to do it.
These days even well-off people are turning to pawnshops for short-term loans. And now a new breed of pawnshop is catering to this new client's needs.
Pawning for the well-heeled
Pawnshops have long had a reputation for being dingy and dismal; a place you'd rather not take your mother or even admit to having visited.
But now no one need be the wiser: Pawnshops have entered the modern age, with sites like Pawngo.com and UltraPawn.com offering a private, completely online short-term financing option for those who want to avoid traditional borrowing avenues such as payday loans and credit card advances. (Other high-end pawnbrokers -- aka "upscale collateral lenders" or "personal asset lenders" -- like Borro, The Provident Loan Society of New York and Beverly Loan Company (as in 90210), have online presences but conduct business primarily via their physical locations.)
The typical pawnshop customer has changed along with the times, too. "A lot of the people we work with have good credit," says George Souri, a former private equity finance expert and CEO of UltraPawn.com. "Our model is to give savvy consumers of financial services a viable alternative to other loans. Wealthy people have cash needs, too."
Indeed they do. For example, one customer borrowed $50,000 against a painting so he could take an expensive luxury cruise with his wife. He didn't want to sell any investments or take out a long-term loan, so he pawned the painting and repaid the loan once his bonus was paid. Another customer pawned a Ferrari.
Just like traditional pawnshops, online pawn sites evaluate your item and give you an offer, and, if accepted, quickly get the loan amount to you. They typically hold an item for 30 to 90 days. You pay a monthly finance charge and, at the end of the loan period, repay the principal balance of the loan and any remaining interest due. If you can't repay the loan, the pawnbroker renegotiates the loan or sells your item.
But unlike pawnshops that accept everything from gaming systems to televisions to household appliances, this new breed focuses on higher-end items, like Cartier jewelry, fine art, rare wine, antique maps, motorcycles, and loose diamonds. Correspondingly, the loan amounts are higher, too, and the loan terms can be longer.
Pawngo and UltraPawn will make loans ranging from $500 to $1 million with loan terms for up to six months. (UltraPawn's loans average $5,000 to $20,000.) A typical brick-and-mortar pawnshop offers 30-day loan terms on much lower amounts (mostly in the hundreds of dollars). Because they're catering to a higher-end clientele, services like storage, insurance, and shipping are free.
There's also a difference in interest rates: "Traditionally pawnshops charge interest rates of 18 to 22 percent, but the online model for pawning offers tremendous operational efficiency compared to traditional brick-and-mortar stores that require a building, a staff, and utility payments," says Souri. "We charge as little as 2 percent."
Getting credit off the grid
One of the "advantages" of pawning -- whether at a traditional shop or online -- is that your bad borrowing behavior won't haunt you for long.
Customers who can't repay their loans will not get calls from collection companies or discover negative notations on their credit reports. The only negative impact of defaulting on the loan is losing your possession.
On the flip side, a customer who builds a good payment record with a firm can be rewarded with lower interest rates on future loans. "So maybe we charge them 5 percent in interest on the first loan, but if they have a positive history with us we'll charge them 3 percent next time," Souri says.
While being a responsible borrower at a pawnshop has its rewards, your "credit history" doesn't translate to the real world of banking and borrowing. Still, pawning is one way to ease your cash flow, but remember that it won't help your long-term credit outlook.