Frank Pajares was an amazing professor at Emory University. He changed lives… and in my specific case he would routinely kick me out of my philosophical foundations at will. “It takes a meaning to catch a meaning.” he would tell me along with the rest of his class during one of our many heated debates. The ‘act’ of putting yourself in someone elses shoes is always a difficult thing for any of us to do. Especially in academia where strong opinions and cultural isolation are the reality of the day. The same is true for the corporate world as well. Speaking of which…
I don’t believe title pawns are necessarily a bad thing. To be blunt about it, these companies go in risk areas where ‘traditional’ lending sources simply don’t have the guts… or legislative approval. They also satisfy a need that isn’t always a ‘desperate’ one.
A lot of folks associate these pawns as places to go when you have no job, no income, and no other asset other than your car. The reality for most of their customers is far less apocalyptic. The paycheck to paycheck folks comprise the largest segment of their clientele and the blue collar ‘cash’ businessman is not too far behind them. The first group will typically have some type of large expense (often medical or automotive) that will put them behind on their rent, utilities, or their own business. A customer who doesn’t pay. A hospital visit. In tight financial times it’s all too easy to get behind the eight ball, and short-term loans are not easily available from local banks or the greater community.
Title pawns can essentially provide a loan at a lower rate than most payday lenders or even banks… if you take into account current ‘overdraft protection’ fees. The nearly risk-free conservative environment that has historically been modern banking really has no equal in the title pawn world. Even though the effective rates of interest for the ‘established’ businesses are usually far higher in real world terms.
The cash clientele for title pawn companies is also especially risky. These folks may be in construction or work for a business that is paying them under the table. When that business closes, has difficulty getting paid, or simply has a lull, that cash customer still has to pay their bills. Banks won’t loan to them at all and often times their friends and relatives are struggling to make ends meet as well. It’s sad. But it’s the modern truth. When these customers move, they can often do it with nary a paper trail leaving the lender in a lurch.
The title pawn companies finance these people and most of them do pay it off. As a pawn they also have far less recourse than a bank or other accredited financial institution has at their disposal. When you pawn, you essentially do so without the safety nets of insurance, legal remedies, or a market where you can package and trade all of these debt obligations. In practice, there really is no such thing as exporting or diversifying away any of these risks. When you lend that customer $5000, your bottom line loss if that customer disappears is $5000 plus expenses.
The local authorities are also not exactly willing to enforce help you with these agreements. For example, I’ve seen a surprising number of these disappeared vehicles at repair shops with bills that were never paid.. The owner of the shop will either strip them for parts or pursue a ‘bonded title’. Since the larger pawn companies frequently charge-off these loans (expense them as losses and essentially give up collecting), the chance for any type of recourse from a title pawn once a customer is gone is extremely slim.
Title pawns also have to deal with a lot of flakes and criminals. Unreturned phone calls. Broken promises. Disconnected phones and outright felons who will try to either acquire multiple loans or simply part out the vehicle after getting a loan. There is a well publicized case in Georgia where a title pawn company is actually suing someone for selling the car to a junkyard after they already pawned the title. The amount is only $350. But the frequency this happens is far greater than most would imagine.
Finally, you do have a free market. Some title pawn companies charge no interest (but a fee or two) for a thirty day loan. Others will offer teaser rates or a far lower rate than the competition. There is nothing under the rule of law that is mandating these companies to charge 187.5% interest, and many of them do not. In most areas where title pawns are legal, the competition is literally able to set up shop across the street. Which brings me to the big point here.
Cars represent different things to different folks. Transportation. Freedom. Asset. They have a different meanings base on the use and it’s value. In dollars and cents, there is absolutely no difference between a car and any other asset that is loaned, leased, or hocked. A car, like a home, has a value to it. Since houses and vehicles are routinely bought, financed and sold millions of times a year, the argument to make title pawns illegal is very difficult to justify
So the question now becomes whether title pawns should be regulated like other financial institutions. Or whether the free market will eventually bring supply and demand to a competitive equilibirium. Many of us believe in the idea of a free market. Many of us also believe in a fair fight. These two competing ideas are really guiding the debate as to whether title pawns are benefactors or predators. The answer isn’t cut and dry. Which is why lobbyists and advocates will continue to fight it out in the marketplace, the courts, and the state legislatures.