By on July 8, 2010

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.

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40 Comments on “Hammer Time: Title Pawn Pro...”


  • avatar
    john.fritz

    Thank you for telling the non-emotional truth about these companies. They serve a need in the market. There is a demand for their services, otherwise they wouldn’t exist. No one is hold a gun to anyone’s head forcing them to conduct business with them. What’s the difference between these establishments and a pawn shop save for the type of collateral? No one that I’m aware of is demanding that we regulate pawn shops.

  • avatar
    educatordan

    Pawns in and of themselves are not bad. I live in the desert Southwest USA and have seen the population that uses pawn as a form of banking. The local credit union isn’t going to loan you money against your giant turquoise, coral, and silver belt buckle. Having said that I would personally rather take out a loan for say $2,500 at the local credit union at a rate of 10% interest rather than credit card or pawn. But I realize not all states allow that. New Mexico does because they want to try to give the title loan/payday loan places a little competition.

    BTW my favorite watchband (turquoise, coral, and silver by a famous local artist) came straight out of the dead pawn at a local trading post that has existed for the past 100 years.

  • avatar
    twotone

    Title Pawn and payday loan companies are nothing compared to the Bernie Madoffs, AIGs and Lehmon Brothers in this country. At least they put cash in the hands of the little guy and don’t get taxpayer bailouts.

    Twotone

    • 0 avatar
      bunkie

      You might want to do a little research into the funding behind the payday loan business. It will come as no surprise that much of it comes from the big financial firms.

      Madoff suckered a lot of people who, frankly, should have known better (and who were looking for unreasonable returns). The payday loan sharks prey upon people who have no access to banks. It’s an old story. Orwell wrote about the immense profits to be made from the poor in his book Down and Out in Paris and London.

  • avatar
    psarhjinian

    I’m amazed at how much the American medical system really costs it’s citizenry.

    Not only does it cost more than the socialized systems of other western nations, not only are there the costs of private and group insurance on top of that, not only is there the indirect cost of people getting sick from lack of affordable preventative care, but there’s the economic cost of “downtime” because people can so quickly be put behind the eight-ball.

    All the while delivering a lower average standard of care.

    And yes, I know I’m trolling. So be it.

  • avatar
    segar925

    psarhjinian, You’re not only trolling, but you’re full of liberal B.S. We have the best healthcare system in the world, that’s why people from all over the world come here for healthcare. If you don’t like your healthcare here, please move to Cuba.

    • 0 avatar
      NulloModo

      I’m pretty sure he’s Canadian.

      We have some of the best doctors and hospitals in the world in the USA, that’s true, but our healthcare system sucks. Unless you work for the government or are lucky enough to have an employer who doesn’t skimp on the health insurance they offer, taking advantage of those great doctors and hospitals can easily bankrupt you.

      I’d much rather have Canada’s system where everyone’s taxes go into a common pot, and if you get sick, you go to the doctor, they take care of you, and you aren’t charged. I have health insurance, I have to pay monthly for it out of my paycheck, and it doesn’t even begin to repay medical expenses until I’ve spent more than $2,500 in a given year, and even after that it only covers 80%. When you have hospitals that charge ridiculous sums for MRIs, tests, consults, etc, the actual bill can be well over $100,000 for a simple operation, which turns into $20,000 worth of debt (well, plus the $2,500 out of pocket I already spent).

      You shouldn’t have to worry about getting sick or getting hurt ruining your financial stability for the rest of your life.

    • 0 avatar
      BDB

      Right, it’s the best in the world if you’re either independently wealthy or a government employee. The problem isn’t quality, it’s access, and the access to our healthcare system sucks.

      Yes, when super-wealthy foreigners or politicians get sick they come here for care–but that’s because they have money! Given that I’m just a normal middle class person, I’d much rather get cancer in Toronto than Buffalo.

      Actually , ideally, I’d have us adopt the French and Swiss hybrid models which has the benefits of both socialized and private care while limiting their downsides. It would also fit better, culturally, with Americans than a Canadian or British-style system. EDIT: And we sort of tried to do that last year, but the public option got dropped so now we’re mandating (and subsidizing) people to buy into a broken system.

    • 0 avatar
      psarhjinian

      Yes, I’m trolling. An oh yes, I’m liberal. Very much so.

      In absolute terms, yes, you can get the best quality of care in the world in the US, with the proviso that you have to pay for it. If you cannot pay for it, you actually are better off in Cuba**.

      I hear, quite often, about rich Canadians and such who travel to the US for care and, yes, it’s true that they do. There are a few thousand who do. Now, tell me, where do the hundreds of thousands, if not millions, of lower and middle-class Americans go? Can they go to Canada?

      ** Interesting point: Cuba’s maternal and infant care programs are some of the best in the world, and something that many nations in Europe have chosen to emulate. I know they shame Canada’s.

    • 0 avatar
      sitting@home

      Sorry segar, the facts don’t back you up. From http://en.wikipedia.org/wiki/Medical_tourism …

      “an estimated 60,000 to 85,000 medical tourists were traveling to the United States for the purpose of receiving in-patient medical care; the same McKinsey study estimated that 750,000 American medical tourists traveled from the United States to other countries”

      People may come to this country for advanced care, but a lot more people go out of this country because they can’t get care at all.

      In the ten years I’ve been running a small business the cost of medical insurance has almost quadrupled and we now ask employees wherever possible to use spousal coverage. Most people are oblivious to the actual cost of insurance because as it is not listed on any wage or benefit forms; they complain about not getting a pay rise but the cost of employing them is steadily rising.

    • 0 avatar
      BDB

      Jesus, Psar, don’t bring up Cuba, even if it’s true, you’re just provoking red-baiting now!

    • 0 avatar
      geeber

      sitting@home: People may come to this country for advanced care, but a lot more people go out of this country because they can’t get care at all.

      Yet, they can afford to pay for an airline ticket to an overseas destination (generally not cheap), the cost of the health care (these countries aren’t providing it for free, especially to foreigners) and the cost of staying in the country during the recuperation process (hotels, meals, etc., cost money).

      If they can afford this, I would wager that they can afford the cost of health insurance. They just don’t want to pay, and would rather just pay for health care on an as-needed basis.

      Also note that a fair amount of American health tourists have traveled overseas for cosmetic surgery (and often with less-than-satisfactory results). I guess that shows that we need to have a government program for boob jobs, too…

  • avatar
    folkdancer

    Thank you for helping me understand this business.

    I agree completely with john.fritz, educatordan, twotone, and especially with psarhjinian above. Our medical system is out of control from so many angles and puts people in the position where they need loans.

  • avatar
    blowfish

    I’m amazed at how much the American medical system really costs it’s citizenry.

    At least living in the Republic of Canuckstan, we have gov medical system.
    Is not perfect, and if u need things done in a hurry u could pony up mulla & go south to get it done as quick as u can get your derriere there.
    And now there’re a few cash clinic here too. U dont even need to flash your passport nor board a Silvery bird.

    The regular Medical system do offer a timely vait, some folks who may not have all the time in their hands do have to pay ultimately with their lives.

    There’re also alternative system for the US citizenrys, some go to Mumbai et al India , where they can get triple, quadruple bypasses for a % of what they pay at home.

    Here in Canada the malpractice law suits are usually contained to a liveable limit, not Joint & Several deal, so the Doctors no need to skip town, and his assets kind of still intact.
    Is not the best system atleast we all compromise and trying to live a little bit more happily.

  • avatar
    Steven Lang

    Guys, The Truth About Medical Care is on the second outhouse to the left.

    This is about title lending. Unless you want to expound on the possibilities of pawning body parts, the health care debate really belongs in some future Farago web site.

    • 0 avatar
      psarhjinian

      Hey, you brought it up. Barely. In a sideways sort of way.

      Ok, ok, I’m sorry.

      On a serious note: that these kinds of enterprises exist to serve a need is a problem not because of who they are, but because they’re indicative of a larger problem of just how over-leveraged the bulk of the population is. It gets back to comments in your other article about the use of credit as a substitute for wealth, which is in turn a necessary evil when people, quite frankly, are not paid enough. If they were, we wouldn’t need to provide such gross incentives for borrowing.

    • 0 avatar
      ihatetrees

      On a serious note: that these kinds of enterprises exist to serve a need is a problem not because of who they are, but because they’re indicative of a larger problem of just how over-leveraged the bulk of the population is.

      Low income is less than 1/2 the problem. Basic financial management and budgeting skills are the hidden part of the iceberg. The schools could fix this, but it’s politically tricky teaching kids that their parents’ financial practices are borderline.

      Also, there’s the millions of Americans who speculated with home ownership (due to both financial industry and government policies) who are now house poor. Canada and Australia have largely escaped a crisis in housing – housing ownership is lower by several basis points. There are fewer marginal buyers and more stringent lending terms – CA and AU banks often hold mortgages in house.

    • 0 avatar
      geeber

      I agree that we need to place greater emphasis on the “financial facts of life” in our schools.

      But money management and sex/romance are two areas where I’ve seen the old adage proved true time and again – you can lead a horse to water, but you can’t make him drink.

      And it’s not just lower income people – I’ve personally witnessed people with advanced degrees get in over their heads financially. And then repeat the same mistakes, despite the prior experience and warnings from friends, family, etc.

      What people forget is that before the widespread advent of these enterprises, people often turned to real loan sharks for money in desperate times. And those lenders weren’t inclined to write off bad debt, and they weren’t exactly gentle in their collection methods…

    • 0 avatar
      psarhjinian

      That is true, but it again gets back to the problem of fiscal un-sustainability on a large scale.

      You need consumer spending to drive an economy, but you can’t have consumer spending if you don’t have wealth. Wealth at the middle- and lower-class levels would draw wealth from the upper classes and would present problems of short-term competitiveness. So what do you do? You use credit as a substitute for wealth and it works right up until the point it doesn’t.

      Teaching fiscal responsibility is like teaching interpersonal skills or morals. You can do it, to a degree, but it’s also a function of someone’s tolerance for risk estimation, which is built-in rather than learned. What we need to do is stop giving people the rope they’re hanging themselves with, and we can’t do that (lock up access to easy credit) without serious short-term economic harm as there’s not likely to be wage increases to fill the gap caused by the loss of credit.

      And if anyone says “well, just cut taxes!”, please do remember that the people who are affected by this situation don’t pay much in the way of tax anyway.

    • 0 avatar
      geeber

      If we stop giving people the rope to hang themselves by banning or sharply curtailing these types of businesses, they will simply go to other, even less savory, lenders. And these lenders aren’t too worried about being too brutal in their collection methods.

    • 0 avatar
      NulloModo

      Low income areas, especially urban ones, typically have a fairly high crime rate, and a prevalence of drugs, prostitution, illegal gambling, and other unsavory methods of income generation. For a child who grows up in an area seeing drug dealers driving around in luxury SUVs with 24″ rims like they see their rap-star role models in, it can seem hard to justify living a rather austere existence within the law.

      Thus you have problems both with people living outside their means legally, and getting into financial trouble, or increasing their means illegally, and getting into legal trouble, which in turn leads to more financial trouble, expounding the whole situation.

    • 0 avatar
      ihatetrees

      geeber:
      And it’s not just lower income people – I’ve personally witnessed people with advanced degrees get in over their heads financially. And then repeat the same mistakes, despite the prior experience and warnings from friends, family, etc.

      That our financial system allows mistake after mistake is a big problem. The incentives need changing. Many people need to reach the end of the lending rope quicker. They need to learn to live in a smaller house (or horrors – an Apartment!!!!) and drive a small/used/beater car.

      What people forget is that before the widespread advent of these enterprises, people often turned to real loan sharks…
      …and they weren’t exactly gentle in their collection methods…

      You seem to consider that a bad thing. From an economic perspective, at least the cost isn’t externalized to society – it’s localized to the person in question (or his body part).

  • avatar
    john.fritz

    Our health care system is the best overall in the world. It became that way because of the free market environment it evolved in. Quality of care has diminished and costs have increased due to increasing government involvement. We currently have a socialized system of medicine in this country (Medicare, Medicaid, endless entitlement benefits), that’s why it’s in the sad shape it is.

  • avatar
    werewolf34

    Making money off poor people is the new black

  • avatar
    mikey

    I agree with you psar. I higher education has no bearing,on plain common sense. 23% is the going rate for the “we finance” places around here. A young man I know with a wicked credit history,and many years of post secondary education,wants to take a 10K loan and spread it over 3 years.

    He is looking at a tired 2004 Montana with 140klm’s, on a good day the van might be worth 7 grand,and the dummy will have spent 15 grand IF, it will last until its paid for.

  • avatar
    findude

    Nice article. I point out Title Loan places to my teenagers and explain to them the importance of living within 80% of take home pay (the rule I have successfully used, including a number of years living in near poverty). My point to them is that once you slip down to that level of borrowing, your financial situation has already cascaded to where it is difficult to ever get out again.

    But the point, as well as the cause of the digression into medical care, is that Title Pawn shops are part of a SYSTEM that includes many different financial instruments and different kinds of debt. I don’t like title pawn places, but it’s hard to have a complete system without them.

    FWIW, I think the main cause of all the financial chaos the world is experiencing now is the result of excess abstraction in financial instruments–essentially derivatives. Title pawn is very concrete, a borrower pledges a hard (if depreciating) asset as collateral against cash in exchange for an agreed interest rate.

    Good reading at the automatic earth blog (http://www.theautomaticearth.blogspot.com/).

  • avatar
    shiney2

    a quick FYI for the medical conversation… Those 750K medical tourists are not getting on planes, they are driving to Mexico and Canada. In Texas, and my parents and their friends, retired white middle class mid-westerners, all go to Mexico for non-emergency medical care. Quality medical groups catering to Americans are all along the mexican border…. and I personally have crossed over to Canada for medical care.

    • 0 avatar
      ihatetrees

      +1.
      PRK eye surgery is top notch in Canada. I’m still 20/20 at distance after 7 years. In many areas, especially elective procedures where price is critical, the US system is at a disadvantage due to liability costs.

      That said, high end, specialty surgery (without waiting) is a US strength. A homeless guy in NYC will get better care for a heart attack than a CEO in Toronto… Especially on a holiday weekend…

    • 0 avatar
      geeber

      A poster mentioned people visiting Cuba for medical care. I didn’t know that Americans can drive to Cuba. Are they perhaps taking Amphicars?

      And please note that virtually any medical system can provide quality non-emergency care. Treating those conditions isn’t too hard. It’s the more serious conditions requiring more involved treatments and advanced drugs where the U.S. excels, as shown by our higher survival rates for various types of cancer.

  • avatar
    Scorched Earth

    I went to Emory, too!

  • avatar
    Gardiner Westbound

    One cannot look at the U.S. and Canadian systems without also talking about taxes. Our government medicare system isn’t free, or even cheap.

    There would be a second American Revolution if you had to pay taxes anywhere near as high as ours. For the difference an American can buy a gold-plated medical insurance plan and have money left over for a very nice car. Problem is, many buy the car and skip the medical insurance, particularly if they’re healthy. Then they get sick, the insurance company won’t take them or the premium is unaffordable, and they have trouble paying the medical bills. That’s why the Canadian system is mandatory.

    Obamacare will be much more expensive than ours. It will have to support huge civil service and insurance company bureaucracies including million dollar a year insurance executives. Ours has only the civil service burden.

  • avatar
    PeriSoft

    I’m glad I have health insurance, so I can get fixed up when I shoot myself in the face after reading this thread.

    Seriously, the level of hateful, partisan vitriol in this country (the US) is horribly depressing. No discussion – whether it’s about medicine, cars, or movie stars – can last long without a flame war developing between two sides who care only for winning, and nothing for policy or their nation.

    *cue “It’s the other side who are angry and partisan; it’s their fault!” responses in 10, 9, 8…*

  • avatar

    A fascinating and well written article Steven, thank you. I suspect I’m not the only reader for whom you just threw open a window onto a totally unknown little corner of America, and gave an intelligent and impartial guided tour. Thanks!

    I’m not going to get drawn into the New Civil War (healthcare debate), but from the outside looking in I think findude’s got it nailed: These places are clearly an integral part of the free market system as expressed in the Land of the Free(way).

    Living (as I do) in a small country with a comprehensive public transport network the idea of a Pawn shop for cars is baffling, but thinking about it in an American context it makes perfect sense… it seems somewhat telling that there’s this clear sense of national discomfort surrounding Title Pawn then…

  • avatar
    Robstar

    I really wish the medical debate would be quashed here. This is NOT a medical debate site.

    In any case, I did like the article & believed they should be regulated within moderation on the interest rates/terms.

    I also believe financial education should begin in grammar school, but then again, what do I know? I won’t borrow money unless the interest rate is under 5%.

  • avatar
    Lokki

    “psarhjinian

    July 8th, 2010 at 2:14 pm
    Yes, I’m trolling. An oh yes, I’m liberal. Very much so. “

    Am I the only one who is getting a little bit weary of this?

    This started out to be a discussion of alternative banking. It turned into yet another political discussion.

    Moderators, could you perhaps suggest some moderation?

  • avatar
    psarhjinian

    @ It turned into yet another political discussion.

    Since I started it, I’ll attempt to justify it.

    I don’t think you can separate the kind of social problems that make a requirement of something like “title pawns” from a political discussion. If this is a common thing, and if the reason, as Steven implies, is that medical expenses are putting many people behind the eight-ball, then you have a problem.

    In other western democracies, this does not happen.

    For the record, I’m not advocating banning enterprises like this. What I am saying is that, if they’re widespread, that they’re a canary in a coal mine. If a big chunk of the population is a hairsbreadth away from economic collapse then it would be a very good idea to address the systemic issues before it gets much worse.

    Again, we get back to credit being used as a substitute for depth of wealth in the lower and middle classes. People are over-leveraged, and they’re over-leveraged because a) they’re just not that smart about this kind of thing and b) the lending system is set up to work with that lack of smarts to create a horrible kind of positive feedback loop. We cut more money from the lower three quartiles, which hurts spending power, so we lower credit standards to encourage spending, which siphons more money the wrong way, which means we lower credit standards further, etc, etc. At some point, we hit the wall, and some people will do it sooner than others. It’s made even worse if you live somewhere where the social safety net is so frayed that you’re a heart attack, mental imbalance or at-work accident away from total financial destruction. So now not only are you overleveraged, can’t work and can’t pay to get better.

    And the solutions for that are inextricably political in nature and, personally, I find the idea that medical expenses are the chief cause of people resorting to facilities like this a serious problem, especially when Americans, in net terms, pay so much money for medical care.

    • 0 avatar
      golden2husky

      You probably should have said all of this first; it would look a lot less like trolling.

      “…What I am saying is that, if they’re widespread, that they’re a canary in a coal mine. If a big chunk of the population is a hairsbreadth away from economic collapse then it would be a very good idea to address the systemic issues before it gets much worse…”

      +1. There really should be very little demand for such a business. If business is booming that speaks of an economic time bomb in the making. I never understood the mindset that makes people spend foolishly. Think of leasing, for example. While for some business owners it makes sense but for many people it is a way to get into s car that you can’t afford. Sad part is that they wind up spending even more than they would have buying it in the normal fashion.

  • avatar
    Lokki

    psarhjinian

    I don’t give a damn what you think unless it involves cars.

    Go peddle your politics elsewhere.

  • avatar
    psarhjinian

    So, where do we draw the line, then? Politics comes into discussions about cars and…
    a) the environment
    b) international trade
    c) government bailouts
    d) research and development
    e) labour relations
    f) traffic enforcement

    Heck, we got into politics talking about Paris-Dakar. If we’re going to say it’s inappropriate here, we may as well go full Autoblog and start posting about Hummer-branded cologne.

    I personally don’t mind the segues into politics, even when I don’t agree with the tack being taken because it’s what separates TTAC from much of it’s competition**: that we can have a reasonably intellectual conversation about how these issues relate to our common interest, and that it can be reasonably challenging.

    It’s too useful an intellectual exercise to say it’s out of bounds.

    ** the other thing that separates TTAC from it’s competition is that, when it does get political, it’s usually reasonably high-brow and the use of “Shrub” or “Obozo” is pretty minimal. Usually.


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