Vanderbilt University Law School Law & Economics

Working Paper Number 12 - 26

The Pawn Industry and Its Customers: The United States and Europe

Marieke Bos Stockholm University Susan Payne Carter United States Military Academy Paige Marta Skiba Vanderbilt University

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The Pawn Industry and Its Customers: The United States and Europe1
September 2012 Marieke Bos,* Susan Payne Carter,** and Paige Marta Skiba*** As humankinds oldest financial institution, pawnbroking has served the financial needs of low-income families for centuries. Recently, and especially in the last five years, an increasing number of consumers have relied on pawnbrokers to help them meet daily financial needs. Seven percent of all U.S. and four percent of all Swedish households have used pawn credit at one time or another. Despite the general publics increased interest in the pawn industry, evidenced by the popularity of reality television shows like Pawn Stars and Hard Core Pawn, economists have paid surprisingly little attention to the pawnbroking industry and pawnshop borrowers. We start by reviewing the history of pawn credit and the sparse economic literature on pawnbroking, and then present unique U.S. transaction data and Swedish register data to, first, show aggregate trends, and, second, shed light on the social and financial background of pawnshop borrowers and their behavior within the pawnbroking industry in both countries. We find that the pawnbroking industry and pawnshop borrowers are unexpectedly similar in the United States and Sweden.

JEL classification: C34, C35, D63, D81, G21 Keywords: fringe banking, pawn lending, subprime credit, household finance

Kathryn Fritzdixon provided excellent work as a research assistant. *Bos; Stockholm University. E-mail; marieke.bos@sofi.su.se **Carter; United States Military Academy, E-mail; susan.carter@usma.edu *** Skiba; Vanderbilt Law School, E-mail; paige.skiba@law.vanderbilt.edu

Electronic copy available at: http://ssrn.com/abstract=2149575

I. Introduction

A pawnshop loan is a relatively simple transaction: the broker makes a fixed term

loan to a consumer who leaves collateral in the possession of the broker. If the customer repays the loan and all required fees, the broker returns the collateral to the customer. If the customer does not repay the loan by a specified date, the collateral becomes the property of the broker and the customer's debt is extinguished (Caskey, 1994, pg. 12). The recent economic downturn, in combination with ever-rising gold prices, has caused the pawnbroking industry to boom worldwide. But even before this recent proliferation, pawnbrokers had served the financial needs of low-income families for centuries. What is relatively new is the publics particular interest in the pawn industry. Reality television shows like Pawn Stars on History (formerly The History Channel) and Hard Core Pawn on TruTV, both currently celebrating their sixth seasons, thrive on viewers curiosity about the daily business of pawnbrokers and their customers. This rather unusual mainstream interest in a niche financial institution can be explained by the fact that, even though seven percent of all U.S. households have used pawn credit, most know very little about this ancient form of banking and its customers. We review the economic literature on pawnbroking and find that only a handful of studies have been published on pawnbroking in general. This omission is surprising not only because pawnbroking is a source of credit to millions of people around the world, but also, as Caskey (1991) has pointed out, economists will have a very incomplete understanding of credit markets if attention is not also given to the financial markets faced by the millions of Americans operating independently of the banking system (p. 98). A central question is what effect pawnbroking has on consumer welfare. It is difficult to judge pawnbrokings influence on welfare considering only the absolute amount of credit that is supplied through pawnshops; this amount is bound to be relatively small compared to the credit supplied through regular banking channels because pawn credit involves small, short-term, and collateralized loans. Nevertheless, people who are excluded from the credit supplied through the regular banking system have to rely on alternative financial services like those supplied by the pawnbroking industry. Thus, for those who are credit constrained, pawnshop borrowing may have a significant effect on welfare. The average loan size in the pawnbroking industry is small$80 in the United States and the equivalent of $354 in Swedengiving some indication that pawnshop borrowers face tough credit constraints. Further, more borrowers make good on their pawnshop loans than might be expected: repayment rates are approximately 85 percent in both Sweden and the United States. Together, these facts suggest that pawn credit may play a pivotal role in 1

Electronic copy available at: http://ssrn.com/abstract=2149575

alleviating credit constraints for individuals who have few or no other sources of credit. Theory, too, suggests that pawnbroking can have an important effect on welfare: pawn credit, as an inferior substitute for regular credit, has the potential to provide for short-term consumption smoothing in the face of job loss, unexpected health care expenses, and other personal setbacks. Pawn credit also has the unique (and, to many borrowers, desirable) quality of having no direct impact on ones credit score and therefore no impact on ones future access to credit. Because of this, there is a dearth of data on pawnshop use, which is one reason the literature on pawnbroking is limited. Even the industrys U.S. trade group, the National Pawnbrokers Association, lacks national data on the number of outstanding loans, because only 13 percent of all pawnshops are publicly traded companies required to report their profits. This paper introduces two unique datasets of administrative records on the U.S. and Swedish pawnbroking industries and their respective borrowers social and financial backgrounds. These data make it possible to analyze detailed characteristics of pawnshop borrowers for the first time, offering an opportunity to begin to fill a longstanding lacuna in the literature on financial markets. We find that the pawnbroking market and its customers are strikingly similar in the United States and Sweden, which we take to mean that the more elaborate information on Swedish customers might be reliably extrapolated to their U.S. counterparts. In both countries, the pawnbroking industry has grown steadily for the last decade, with a surge in growth rates after 2007. Typical borrowers take out small, short-term loans collateralized by gold and pay a relatively high monthly interest rate; interestingly, the majority manages to pay back the loan. Furthermore, we find that, compared to the general population, borrowers who use pawn credit are of the age where they are likely to have significant family formation and child rearing costs and are slightly more likely to be female. They are also more likely to be experiencing instability in both their job status and marital status. When they have jobs, they earn on average 20 percent less and are less likely to own a home than the general population. Consistent with the premise that pawnshop borrowers face tough liquidity constraints, we find that they are more likely to have bad credit scores and to have maxed out their outstanding lines of credit than the general population is. The rest of the paper is organized as follows. Section II briefly introduces and reviews the related literature. Section III gives an overview of the pawnbroking industry. Section IV describes the datasets and their sources. Section V analyzes the behavior and characteristics of pawnshop borrowers and compares them to a control group. Section VI discusses potential policy implications and concludes. 2

II. A Review of Recent Empirical Studies

Financial economists have produced a large number of theoretical and empirical studies on mainstream banking services, but alternative financial services, and pawnbroking in particular, are hardly touched on in the literature. Only a handful of studies have been published about pawnbroking during the past five decades, in part because of the lack of industry-wide databases. However, in recent years economists have become increasingly interested in the lending activities that take place outside traditional financial institutions and have been characterized as fringe banking operations. While other forms of fringe banking, such as payday loans, check-cashing firms, and rent-to-own stores, are relatively new, pawnshops have been around for centuries. John P. Caskey, who wrote the lions share of the limited literature on pawnbroking, initiated the first serious economic research in this area. His book Fringe Banking (1994) is the first comprehensive study of pawnbroking and check-cashing outlets in the United States. Notably, he based most of his findings on his own data collection. Caskey (1991) provides some descriptive statistics about the pawnbroking industry in the United States and studies the uneven distribution of pawnshops among states. His conclusion is that regulation in the form of low interest-rate ceilings limits the access to pawn credit by effectively raising the minimum loan amount. He suggests that the ones to suffer from such reduced access will be those whose incomes or credit histories make them ineligible for mainstream credit. Johnson and Johnsons (1998) paper contains an elaborate, survey-based profile of U.S. pawnshop borrowers. They find, among other things, that a typical pawn borrower is less educated, is less stably employed, and has a higher bankruptcy rate than the average American. A paper by Shackman and Tenney (2006) contributes to the empirical research on the fringe banking industry by examining the effects of two jurisdiction-specific regulations that impose restrictions on the supply of pawnshop loans. Based on state-by-state U.S. data, their study supports the hypothesis that the availability of pawnbroking services is lower in states that impose interest rate ceilings and require pawnbrokers to return excess proceeds from the sale of collateral items. The effects of these restrictions include reduced store hours, lower loan/value ratios, fewer very small loans, and a smaller number of pawnshops. A recent set of working papers analyzes the interaction of pawn credit both with credit from the mainstream financial institutions and with second payday loans. Agarwal and Bos (2011) use the same data revealed in this paper, which include the same types of registered information on individuals that is available from both of our datasets, to study whether consumers choose optimally between formal and informal credit. Specifically, they 3

analyze the extent to which credit applications and existing credit lines at mainstream financial institutions influence individuals decisions to use pawn credit. They find that 73 percent of pawn credit borrowers have not applied for regular (cheaper) bank credit before taking out a pawnshop loan. These decisions, however, turn out to be rational; according to Agarwal and Boss calculations, 93 percent of these borrowers loan applications would likely have been rejected had they applied for credit at a mainstream financial institution. Avery and Samolyk (2011) use data from the January 2009 Unbanked / Underbanked Supplement to the Current Population Survey File to examine how household demand adjusted payday loan and pawnshop use is related to effective interest rate ceilings on these products. They find little relationship between the levels of ceilings in their current range and adjusted payday loan use. Results for pawnshop use indicate somewhat more variation in demand-adjusted use over the current range of pawnshop fee ceilings. This finding suggests that lowering loan fee ceilings down to some point could benefit borrowers. Carter and Skiba (2012) use the data from Texas also presented in this paper. They find that default rates vary based on the items that individuals use as collateral. Borrowers who use items such as wedding and class rings, which may have more sentimental value, are less likely to default on their loans. Borrowers are also less likely to default when pawning items that may have consumption value, such as instruments. Carter and Skiba also show that payday loan borrowers often use pawnshops to help repay or prolong repaying a payday loan that they took out from the same institution.

III. Industry Overview

i. Sweden Versus the United States We start with a comparison of the Swedish and American pawnbroking industries.
Table 1 summarizes the main features of both markets. It is striking how generally similar the figures of both countries are. Given the differences in the countries income distributions, the first statisticthat in both countries four percent of the population uses pawn credit on a regular basismay be the most surprising.2 The average interest rate charged by pawnbrokers in the United States is higher than that in Sweden (15 versus 3.5 percent); however, the average loan value is lower in the United States than in Sweden ($150 versus $489). These differences in loan size and interest rate are in line with the initial finding of Caskey (1991), confirmed by Avery and Samolyk (2011), that if interest rates are pushed downward (in the U.S. case because of the
The use of pawn credit in the U.S. adult population has likely risen above four percent in recent years due to the harsh economic downturn, but no new figures are available.
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introduction of interest rate ceilings), the average pawnshop loan size is pushed upward as pawnbrokers set new minimum amounts in order to cover the relatively high fixed operational costs of the pawnshop. In Sweden, where there are no interest rate ceilings, competition has driven interest rates down. The average repayment rate is high in both countries, 80 to 90 percent, confirming that pawnshops do function as lending institutions, not as outlets for stolen goods that will never be retrieved by the borrowers, as is frequently assumed. Table 2 illustrates the differences between male and female borrowers with respect to their most common types of collateral for both the United States and Sweden. 3 Gender differences are at play with respect to the most common types of collateral: men are more likely than women to pledge electronics, guns, and cameras, while women are more likely than men to pledge jewelry and household items. Interestingly, Swedish men pledge art at a higher rate than Swedish women.

ii. History of Pawnbroking Pawnbroking is one of the oldest forms of consumer lending. Pawnbroker activities can
be traced back to China 2000 to 3000 years ago (Ellsberger, 2004), and it is said that the first European pawnshop opened in Italy in the fifteenth century. Pawnshops around the world still use a symbol of three golden globes, which was part of the Medici familys coat of arms and which the family used for their Lombard pawnshops.4 Pawnbroking then came to the United States in the seventeenth century and continued to grow (Caskey, 1994).5 Now, in 2012, there are over 10,000 pawnshops in the United States. Currently, 87 percent of all pawnshops are independently owned, which leaves only 13 percent that are publicly traded and therefore required to report their profits (NPA Industry Overview, 2012). pawnshop companies below. The first pawnshop in Sweden was opened in 1772. To fight the activities of loan sharks, Carl Hke, a major in the Swedish army, started the Generalassistanskontoret (general assistance office), which functioned as a pawnshop with low fees and interest rates in 1772. In the middle of the nineteenth century a few private banks6 started to emerge, and This makes determining the growth and size of the pawnshop industry in the United States difficult. We do report statistics from the three publicly traded

Slightly more women than men use pawn credit; women make up 55 percent of pawnshop borrowers. The three golden globes are also said to originate with St. Nicholas, who lent a man three gold objects so that his daughter could get married and be saved from slavery. 5 For an interesting and more complete account of the history of pawnshops, see Caskey (1994). 6 For e.g., SEB 1856.
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with the introduction of the freedom-of-trade laws (Nringsfrihetslagen) in 1864, the use of both private banks and pawnshops took off. By the turn of the century, there were hundreds of pawnshops around Sweden. In the 1950s, a new pawnbroking law was enacted that put restrictions on entry to the industry and on interest rates. Thereafter, the number of pawnshops diminished again. At the end of the 1980s there were only about 30 pawnshops left. The most recent pawnbroking law (SFS 1995:1000) was introduced in 1995. This law made free entry into the pawnbroking market possible. The law also abolished the locally determined restrictions on the interest rates charged by pawnshops. This, together with a modernization of the surviving pawnshops, caused an upswing in the industry. Currently, in Sweden, there are 25 pawnbrokers, with 56 pawnshops, 14 of them in Stockholm. In 2011, the members of the Swedish Pawnbroking Association, who represent 99 percent of the pawnbroking market in Sweden, provided 393,000 pawnshop loans to their customers, amounting to SEK 1.54 billion ($209,597).7

iii. Pawnbroking and Gold During the period from 2000 to 2011, the price of gold reached record heights. Given
the prominence of gold as pledged collateral (gold represents roughly 80 percent of all pledges), this may explain the growth in the overall outstanding pawnshop loan balance. Figure 1 shows the growth in gold price, the growth in the real outstanding pawnshop loan balance for Sweden, and the end-of-the-year outstanding pawnshop loan balance for the three publicly traded U.S. companies (EZCash, Cash America, and First Cash). It is clear that the price of gold rose even faster in the last decade than did the outstanding pawnshop loan balance for both Sweden and the three observed U.S. pawnbroking companies. The graph also reveals that in both countries the growth in pawnbroking took off starting in 2007, coinciding with the beginning of the financial crisis.

iv. Interest Rates and Fees

a. The United States Pawnbroking is legal in all 50 states and the District of Columbia. State laws
governing pawnshops vary widely: some states set a maximum interest rate charge per 30 days as low as 2 percent, while other states allow pawnbrokers to charge as much as 25 percent per 30 days or do not regulate the interest rates at all. (Interest rates per state are reported in Table 3.) Pawnshops may also be allowed to charge small storage
This amounts to only 0.045 percent of the total amount of consumer credit, excluding mortgages, lent to Swedish households. (source http://www.scb.se/)
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fees for the collateral, but these are often included in the interest charge. Pawnshops are required to report the items brought into the store to the police, and if a pawned item has been reported as stolen, the pawnshop is required to forfeit the item to the police. For this reason, pawnshops require borrowers to present identification and provide a home address before taking out a pawnshop loan.

b. Sweden After Swedens 1995 introduction of a new pawnbroking law, which abolished interest
rate ceilings and entry restrictions, interest rates gradually fell. In 2000, the average monthly interest rate was 3.3 percent, compared to 3.5 percent in 2005. Figure 2 shows a scatter plot of the different monthly interest rates charged by the members of the Swedish Pawnbroking Association for both years. The x-axis expresses the number of pawnbrokers.8 All members charged rates between three and four percent, with more members charging four percent in 2005.

IV. Data
i. The United States Florida and Texas! The Florida and Texas U.S. data come from the administrative records of a large
national payday lender. The dataset consists of pawnshop loan applications made between 1995 and August 2004 in Florida and applications made between 1997 to August 2004 in Texas. From these applications we have information on loan size, application and maturation dates, gender of the applicant, and race of the applicant. We also observe the outcome of each loan: whether the loan was repaid, defaulted on, or renewed. We dropped observations in our sample with missing due dates. We have a total of 9,124,865 observations in our sample from the Florida data and 398,722 from the Texas data.

The FDIC In January of 2009, the Federal Deposit Insurance Corporation (FDIC) added a
questionnaire to the Current Population Survey (CPS) to gain more information on individuals who do not have bank accounts and individuals who use nonbank financial

The set of pawnbrokers changed somewhat during the period from 2000 to 2005.

services. The survey asked whether individuals had a bank account, and asked specific questions on the use of alternative financial services: payday loans, check cashing, pawnshops, rent-to-own arrangements, tax-refund anticipation loans, and nonbank money orders. For each of these services, the survey asked about the frequency of use and the reasons for using the service. These data give us a better understanding of what combinations of services people are using. For someone to be considered a pawnshop user in our sample, he or she must answer yes to the question Have you or anyone in your household ever sold items at a pawn shop? and have a frequency of use of either At least a few times a year or Once or twice a year.

ii. Sweden Our Swedish dataset is constructed in collaboration with the research division of the
Riksbank, the Swedish Central Bank. Data from two sources have been merged using the unique personal numbers of the Swedish pawnshop borrowers. The two data sources are the Swedish Pawnbroking Association (Svenska Pantbanksfreningen) and a credit information agency (Upplysningscentralen, UC) (UC). Members of the Swedish Pawnbroking Association contributed data from their pawnshop operations covering a time period of 15 years starting in 1990. The dataset contains 2.8 million pawn transactions involving 200,313 unique borrowers. Since most borrowers are returning, the data comprises an unbalanced panel dataset. The data contain, among other things, information on the collateral used, the number of loans, the amount of credit, the loan period, the interest paid, and the fees. UC is the main credit bureau in Sweden and is jointly owned by most banks. It stores information on loan sizes, loan applications, and loan performance that is supplied mainly by banks but also by debt collection agencies, and combines this with public information records/registers from the national tax authority. Data on all Swedish residents is stored for at least three years. This information is available to the public. Examples of the information available on pawnshop borrowers are their credit history, their number of applications for credit, the amount they applied for, the line of credit they have available, and the amount of credit they actually use. By using the personal numbers of pawnshop borrowers, UC matched the pawnshop data with information in the borrowers credit registers with a bimonthly frequency for the period starting in December 1999 and ending in November 2005. This merge reduced the sample period of the pawnbroking data, and the remaining dataset contained 1,336,408 observations based on unique loan numbers in the pawnshops. 8

Finally, to be able to compare the characteristics of pawnshop borrowers, UC sampled a control group from its register. The sample consists of 63,000 individuals per year, for the period from 2001 to 2005. The sample was generated by picking people who were not emigrated, deceased, or younger than 18 years old on February 1st of each year, and yielded 313,002 unique individuals.

V. Data Analysis
This Section is divided into three parts. The first part describes the demographic characteristics of both the pawnshop borrowers and the control group. The second part describes information on individual loan behavior, including loan durations, size, and repayment behavior. The third part discusses the creditworthiness of pawnshop borrowers by exploring their homeownership status, income, and Swedish credit scores.

i Demographic Characteristics a. Gender The use of pawnshops is not widely dominated by one gender over the other. In the U.S.
data, the average borrower in Texas is female, while the average borrower in Florida is male. In Sweden, more pawnshop borrowers in the sample are women: 55.2 percent, versus 50.4 percent of the general Swedish population (see Table 4). Johnson and Johnson (1998) suggested two explanations for the overrepresentation of women. First, the most popular item to pawn is jewelry and women often own more jewelry than men. When a household needs quick cash, the owner of the item to be pawned is frequently the one called on to obtain the loan. Second, men are thought to be hesitant to admit, at least publicly, that the household needs quick cash. The woman may be the one to go in and obtain the loan, with the man waiting in the car. In general, woman are more likely to use alternative financial services like payday loans (Skiba and Tobacman, 2011). Complete analysis explaining gender effects in the United States or in Sweden is beyond the scope of this paper.

b. Age The pawnshop samples for both the United States and Sweden have an
overrepresentation in the age group 35 to 44 compared to the general population (see Table 5). The pawnshop sample for Texas had 11 percentage points more people in that group than did the general population for Texas, the Florida sample 10 percentage 9

points more than the general population, and the Swedish sample 7 percentage points more than the general population. People in this age group face more family formation and child rearing costs as well as higher instability in their job status and marital status. The population of individuals above the age of 65 using pawnshops is underrepresented relative to the general population in all locations.

c. Marital Status When looking at the marital status of pawnshop borrowers (see Table 6) a few things
are worth noting: pawnshop borrowers, compared to the general population, are less likely to be currently married and more likely to have experienced a divorce or separation. These results hold for both the United States and Sweden. The differences between the general population and the pawnshop borrowers are consistent with a less stable income situation and a more expensive cost of living for pawnshop borrowers. Most extreme is the overrepresentation of divorced individuals within the pawnshop borrower sample. A sudden income shock could temporarily make it more difficult to make ends meet, and a pawnshop can bring quick solace in these circumstances. Therefore, it is not surprising that we find an overrepresentation of recently (within the last two months) divorced and widowed individuals in the samples of pawnshop borrowers. Interestingly, Roszbach (2004) finds, when estimating a bivariate tobit model, that within the regular Swedish banking sector the probability of obtaining a pawnshop loan is significantly less for divorced women than married women. This result might also partially explain the overrepresentation of divorced women in the pawnshop sample.

d. Summary of Demographic Characteristics Percentage distributions of the pawnshop sample and the general population
have been presented for gender, age, and marital status. The data show a profile of the pawnshop borrower that is not representative of the general population. Based on this sample, the pawnshop borrower is most likely to be female, be between the ages of 35 and 54, and possibly be married, but more likely has recently divorced or has never married. She almost always uses jewelry as a pledge for a pawnshop loan. results are consistent across the U.S. and Swedish data. These

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ii. Loan Characteristics and Repayment Behavior Borrower behavior is also similar in Sweden and the United States, although
borrowers in Sweden typically take out pawnshop loans in higher amounts. The average amount an individual takes out in the United States is only $76 in Florida and $80 in Texas (see Table 7); meanwhile, the average amount in Sweden is just over $350. The loan durations are similar, with borrowers rolling their loan over an average of three times. As shown in Table 7; borrowers in the United States typically took out 3.5 to 8 loans per year of our sample. We can also examine the default behavior of the individual borrowers. In our entire Texas sample, 80 percent of individuals defaulted on at least one pawnshop loan during the time period (see Table 8). Of that 80 percent who defaulted at some point, 33 percent defaulted every time they took out a loan. In Florida, 94 percent of the sample defaulted at least once, but of those borrowers only 17 percent always defaulted. In Sweden, the default rates by pawnshop borrowers show 50 percent of all borrowers defaulting at least once. Of those that defaulted once, only 14 percent always defaulted. Given that defaulting on a pawnshop loan has no negative repercussions on a borrowers credit score, it is interesting to note how many people apparently rely on pawnshop loans for credit with the intention of returning to retrieve their pawned item. In all three samples, more than 70 percent of the borrowers repaid a loan at least once.

iii. Creditworthiness Creditworthiness can be measured by access to mortgages (proxied for by

homeownership), income, and credit scores. We can examine homeownership levels for both countries using the FDIC data and the Swedish data. A unique feature of the Swedish data is information on access to income and credit scores. While this this information is not available in our U.S. data, we have shown that other similarities exist between the U.S. data at the aggregate and the individual levels, making the Swedish findings potentially informative for the United States as well. We discuss the creditworthiness of the pawnshop borrowers compared with the general population. It is notable that creditworthiness from a credit bureau perspective does not relate to consumers ability to borrow from pawnshops. This ability to borrow depends entirely on the value of their collateral, not their own creditworthiness. Thus, much of the discussion in this Section relates to consumers choices, that is, their ability to borrow from other legal lenders that could serve as an alternative to pawnshops. 11

iv. Homeownership The homeownership status of pawnshop borrowers is important for several reasons.
First, homeownership represents, to some extent, a measure of the consumers past creditworthiness. A consumer has to have fairly good credit and a dependable income stream to get a mortgage loan. Second, homeownership represents an ongoing debt commitment that requires a fairly stable income stream to maintain, and the payment record is generally available to current credit grantors. Thus, lenders frequently use homeownership status as one factor in making decisions about granting credit. Finally, homeownership represents an asset that can be used as collateral for a home equity loan. Table 8 presents statistics from the United States and Sweden on the homeownership status of pawnshop borrowers and the general population. From Table 9, one can see that the homeownership rate of the pawnshop sample is much lower than that of the general population: 43 percent versus 71 percent for the United States and 8 percent versus 43 percent for Sweden. Johnson and Johnson (1998) find 26.4 percent homeownership for pawnshop borrowers and 65.4 percent in the United States generally. The difference between pawnshop borrowers and the general population may be influenced, in part, by the metropolitan locations of the pawnshops, where homeownership rates may be lower anyway. Additionally, with respect to the U.S. data, it is somewhat surprising that the homeownership rate among pawnshop borrowers is as high as it is. It would be interesting to see whether these pawnshop borrowers eventually defaulted on their mortgages. We cannot tell whether the borrowers took out pawnshop loans before or after obtaining a mortgage. If these borrowers were already relying on pawnshop loans prior to getting a mortgage, it may be a signal of too much credit being extended to subprime borrowers (which contributed to the financial crisis). It may also show that homeowners are struggling and thus having to turn to pawnshop loans to supplement their credit.

v. Employment Characteristics We now turn to study Swedish data independently and examine income trends
and credit scores of pawnshop borrowers. This detailed information is lacking in the U.S. data, but studying the characteristics of pawnshop borrowers in Sweden will shed light on the characteristics of borrowers in the United States given the general similarities in both countries pawnbroking industries and their borrowers so far. 12

Figure 3 illustrates the distributions of the log of the total income and the log of the income from work for the control group and the pawnshop borrowers by kernel density estimates. As one can see, the distributions for the control group and the pawnshop borrowers are very similar for both kinds of incomes. Figure 4 further documents the difference between the general population and the pawnshop borrowers by showing the differences between these groups graphically over the whole distribution. The vertical axis measures the percentage difference between the groups and is calculated in the same way as in Nguyen et al. (2006).
Difference = 100% * (income

Pawnshop

income Swedish Population) / income Swedish population

From the pattern of this graph, one can see, first, that the difference between the pawnshop borrowers and the control group is always negative. It is larger at both the top and the bottom of the income distribution and constant in most parts of the distribution, minus 20 percent. Second, the differences are more extreme at the bottom and less extreme at the top for income from work compared to the total income distribution.

vi. Credit Scores As discussed briefly above, UC estimates a default risk for individuals in their
credit register. This default risk (or credit score) ranges from 0 to 100 with 0 indicating no default risk at all. The cutoff point between having a good credit score and a bad one lies around 6 to 10, with good implying a positive probability to obtain mainstream credit. Figure 5 illustrates the different kernel density estimates of the UC credit score for both the general population and the pawnshop borrowers. The cutoff range 6 to 10 is marked in the Figure. The density of the general population (control group) distribution lies almost completely on the good side of the cutoff range; in contrast, the pawnshop borrowers have a bulk on both the good side and the very bad side, where estimated default risks are more than 90 percent. These results suggest that pawnshop borrowers have a harder time accessing traditional forms of credit, which makes them turn to more expensive pawnshop loans instead.

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VI. Conclusion
Despite the growing public interest in and use of pawnshops around the world, basic knowledge about the industry and its borrowers is lacking. This paper fills this gap: by comparing U.S. transaction data and Swedish registered data we are able to present a unique picture of both the industry and its borrowers. We conclude that despite the big difference in the income distribution in these two countries, their respective pawnbroking industries and pawnshop borrowers seem to have similar characteristics and behave in a remarkably similar fashion. In both the United States and Sweden, the pawnbroking industry has grown steadily for the last two decades at a rate of 3 to 4 percent per year. However, the financial crisis initiated an exponential growth spurt in both countries with annual growth rates of more than 20 percent starting in 2007. Surging gold prices backed this growth in the industry, as gold is the most commonly used form of collateral for pawnshop loans. On average, borrowers take out a loan of $150 in the United States and $350 in Sweden. They pay relatively high interest compared to the interest paid on mainstream credit: around 15 percent in the United States and 4 percent in Sweden. In both countries these are short-term loans, lasting about two- to three-and-a-half months, and, surprisingly, 80 percent of borrowers manage to repay their loans (although we have anecdotal evidence that this number has deteriorated significantly in the last few years). Nevertheless, pawnshop borrowers do not risk ruining their creditworthiness and thereby their future credit access, because pawn credit is fully covered by the collateral that is handed to the broker at the origination of the pawnshop loan contract. We find that, relative to the general population, borrowers who use pawn credit are slightly more likely to be female and of the age where they are likely to face significant family formation and child rearing costs. Furthermore, we see that they are more likely to experience instability in both their job and marital status, being more likely to be divorced or separated. On average, they are less likely to own a home, although this difference is much larger in Sweden than in the United States. From the Swedish data, we can see that pawnshop borrowers are also more likely to have bad credit scores and to have maxed out their outstanding lines of credit. We find evidence that exclusion from regular credit, exacerbated by the recession through job loss and financial difficulties, has certainly driven more consumers to rely on pawn credit. The same reasons borrowers turn to pawnshops are also the reasons people turn to payday loans, a similar short-term credit product where borrowers write a post-dated check as collateral for their loan. While controversy surrounds payday 14

loans, pawnshops have stayed out of public scrutiny. Campbell, Jackson, Madrian, and Tufano (2011) suggest that one regulatory approach to dealing with payday loans is to encourage alternatives. Those authors do not mention pawnshops explicitly, but a benefit of pawn credit is that it allows borrowers to escape the debt cycle, since defaulting on a pawnshop loan will not influence the individuals credit score and the risk is covered by collateral. Pawnshops, however, only provide borrowers with as much credit as the pawned item is worth, possibly making pawn credit less desirable (from the consumers perspective) as a loan product.

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VII. References
Agarwal, Sumit and Bos, Marieke, 2011. Rationality in the Consumer Credit Market: Choosing between Alternative and Mainstream Credit. December 2011. Available at SSRN: http://ssrn.com/abstract=1978574. Avery, Robert and Samolyk, Katherine, 2011. Payday Loans versus Pawn Shops: The Effects of Loan Fee Limits in Household Use. Working Paper, September 2011. Campbell, John Y., Howell E. Jackson, Brigitte C. Madrian, and Peter Tufano.2011."Consumer Financial Protection." Journal of Economic Perspectives, 25(1): 91114. Carter, Susan and Paige Skiba, 2012 Borrowing from Peter to Pay Paul? Pawnshops and Payday Loan Debt Cycles, Working Paper. Caskey, John P., 1991. Pawnbroking in America: the Economics of a Forgotten Credit Market. Journal of Money, Credit and Banking. Vol. 23, 8599. Caskey, John P., 1994. Fringe Banking: Check-Cashing Outlets, Pawnshops, and the Poor. Russel Sage Foundation: New York. Ellsberger, Per, 2004. Pantla! n, Om ra" nta och va" rdepappersra ttsliga konflikter i pantbankernas kreditgivning, Stockholm, Jure Forlag AB. Johnson, Robert W. and Dixie P. Johnson, 1998. Pawnbroking in the U.S.: A Profile of Customers. Washington, District of Columbia: Georgetown University School of Business, Credit Research Center. Nguyen, Binh T., James W. Albrecht, Susan B. Vroman, and M. Daniel Westbrook, 2006. A Quantile Regression Decomposition of Urban-Rural Inequality in Vietnam, Journal of Development Economics, forthcoming. Pawn Industry Overview, 2012. National Pawnbrokers Association (NPA), March. Roszbach, Kasper, 2004, Bank Lending Policy, Credit Scoring and the Survival of Loans", The Review of Economics and Statistics, 86(4): 946-958. Shackman, Joshua D and Glen Tenney, 2006. The Effects of Government Regulations on the Supply of Pawn Loans: Evidence from 51 Jurisdictions in the U.S. Journal of Financial Services Research, Vol. 30, 69-91. Skiba, Paige Marta and Jeremy Tobacman, 2011. Do Payday Loans Cause Bankruptcy? Vanderbilt Law and Economics Research Paper No. 11-13.

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Table 1 Pawnbroking in Sweden and the United States Years 20002005

Exchange rate September 2012, SEK 1 ~ USD 0.15 Sources: United States, survey by National Pawnbroking Association Sweden, registered data from the Swedish Pawnbrokers Association.

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Table 2: Top Pledges for Men and Women 20002005

Sources: United States, survey by National Pawnbroking Association Sweden, registered data from the Swedish Pawnbrokers Association.

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Table 3 Interest Rate Ceilings by State in the United States

State Alabama Alaska Arizona Arkansas California Colorado Connecticut DC Delaware Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Rates / Month 25% 20% 8% no cap 2.5% local rules 3% 5% 3% 25% 25% 20% no cap 3% 3% no cap 10% 2% 10% 25% no cap 3% 3% 3% 25% 2% State Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virginia Wisconsin Wyoming Rates / Month 25% no cap 10% no cap 4% max{7.50, 10%} 4% 2% local rules 5% 20% 3% 2.5% 5% 22.5% no cap 2% $20 10% 3% 5% 3% no cap 3% 20%

Note: The state laws on pawnshops are collected from individual state governing or regulatory bodies.

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Table 4 Gender Division among the General Population and Pawnshop Borrowers: The United States and Sweden
Texas Pawnshop Borrowers Percent Female N 57.68% 415,983 Population (2000 Census) 50.96% 14,965,061 Florida Pawnshop Population Borrowers (2000 Census) 43.53% 9,051,139 52% 12,336,038 Sweden Pawnshop Population Borrowers Sample 55.20% 1,336,408 48.90% 313,002

Note: Population data for Texas and Florida from the 2010 Census only includes the population older than 18 (the age when one is legally permitted to take out a pawnshop loan).

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Table 5 Age Distribution Among the General Population and the Pawnshop Borrowers: The United States and Sweden
Texas Florida Population Population Pawnshop (2000 Pawnshop (2000 Borrowers Census) Borrowers Census) 18 to 25 25 to 34 35 to 44 45 to 54 55 to 64 65 + N 9.05% 29.10% 33.17% 20.35% 6.45% 1.89% 416,628 14.69% 21.13% 22.20% 17.45% 10.68% 13.85% 14,965,061 18.75% 33.74% 30.32% 12.82% 3.34% 1.03% 8,992,145 10.79% 16.89% 20.15% 16.78% 12.64% 22.76% 12,336,038 Sweden Pawnshop Borrowers 7.90% 18% 25% 22% 16% 11% 1,336,408

Population 9% 17% 18% 17% 16% 24% 313,002

Note: Population data for Texas and Florida from the 2010 Census only includes the population older than 18 (the age when one is legally permitted to take out a pawnshop loan).

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Table 6 Marital Status Among the U.S. and Swedish General Population and Pawnshop Borrowers
United States Pawnshop Borrowers (CPS) Married Divorced / Separated Widow(er) 41.08% 19.77% 3.36% Population (CPS) 57.12% 12.40% 6.53% Sweden Population Sample 45% 11% 8%

Pawnshop 26% 27% 4%

Note: The U.S. statistics come from the January 2009 Current Population Survey and include borrowers who had taken out a pawnshop loan in the previous year.

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Table 7 Loan Characteristics

Mean Texas Duration (days) Loan Amount ($) Nbr. Rollovers Nbr. Loans Per Customer/Year Florida Duration (days) Loan Amount ($) Nbr. Rollovers Nbr. Loans Per Customer/Year Sweden Duration (days) Loan Value (2012 US$) Nbr. Rollovers Nbr. Loans Per Customer/Year 109.0 79.5 3.6 3.5 Min. 0 0 0 1 Max 2,849 3,000 95 151

81.1 75.8 2.7 7.7

0 0 0 1

3,155 9,000 105 42

141.0 353.8 1.0 4.0

1 7 0 1

2,062 235,074 53 54

Sources: U.S. transaction data from a large pawnshop corporation and Swedish register data.

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Table 8: Probability of Default

Texas Full Sample Percent who Default at least Once Default at least Once Percent of those who Always Default 80% 33% Florida 94% 17% Sweden 50% 14%

Sources: U.S. transaction data from a large pawnshop corporation and Swedish register data.

Table 9 Homeownership for the General Population and the Pawnshop Borrowers: The United States and Sweden
United States Pawnshop Borrowers (CPS) Own a Home 43% Population (CPS) 71% Sweden Population Sample 8% 43%

Pawnshop

Note: The U.S. statistics come from the January 2009 Current Population Survey and include borrowers who had taken out a pawnshop loan in the previous year.

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Figure 1 Growth Rate Outstanding Loan Balance in the Pawnbroking Industry and the Gold Price
(Deflated and Indexed 2003)

Notes: U.S. data is from the financial statements of EZCash, Cash America, and First Cash.

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Figure 2 Monthly Interest Rates Charged by the Members of the Swedish Pawnbrokers Association: 2000 and 2005

Figure 3: Kernel Density Estimates of the Log of Total Income for the General Swedish Population and the Swedish Pawnshop Borrowers

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Figure 4 Difference in Total Income Before Tax over the Different Percentiles Between the Pawnshop Borrowers and the General Swedish Population

Figure 5 Kernel Density Estimates of the Credit Score for the Swedish Control Group and the Swedish Pawnshop Borrowers.

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