When his family lost their Colorado farm in the late 1980s, a young Todd Hills went into town to pawn his saddle. “I got a lot less than the saddle was worth,” says Hills, ”but I walked away with a job.” That’s right: He went to work for the pawn broker — and had soon worked his way up the company ladder. He later struck out on his own and eventually sold his own 30-store pawn operation to a publicly traded firm in 2007.
At that point, he stepped back and looked at the industry through a different lens. He saw two phenomena going on at the same time. One, the internet was developing into an ideal medium for scaling the traditional pawn model. And two, the financial crisis was creating a new kind of cash-crunched customer – middle- and upper-class folks, as well as entrepreneurs, looking for a financing alternative.
In 2009, Hills launched Pawngo, which he initially called Internet Pawn. “At first people thought I was crazy to think people would mail in their valuables,” says Hills. Yet, the convenience and discretion of pawning items from home seemed to trump concerns about losing grandma’s silver in the mail. Customers apply online and receive an initial estimate within seconds. They overnight the items free of change and fully insured, and funds are typically deposited into customer bank accounts within 24 hours.
Pawngo isn’t the only game in town – iPawn.com, Pawntique.com, and PawnUp.com have similar models – but with about $13 million in funding and guidance from Lightbank (Groupon’s founders turned venture capitalists), Pawngo is making big strides. The company generated about $6 million in revenue in 2012, up from $1.3 million the year before.
As Hills surmised, online users are considerably different than traditional pawn clientele, whom Hills describes as people needing a couple hundred bucks to pay their cell phone bill. Pawngo’s average loan is $2,800, and many customers are small business owners or self-employed professionals needing to cover a temporary cash crunch.
Loans are typically made for 80% of an item’s current market value, and interest rates range from 4% to 8% per month depending on the item. That works out to a whopping 48% to 96% per year, which is high even compared to credit cards. But Pawngo says 85% of its customers pay back their loans, and typically within three to six months.
While the rates are high, the benefit of the loans is they typically come with no strings attached. “In the event of default the borrower loses the item rather than being subject to wages garnered or other legal actions,” says Tom Feltner, director of financial services at Consumer Federation of America. For anyone thinking of pawning an item, he recommends they calculate the true cost of financing up front and make sure they get a fair appraisal, since that will affect the overall cost of credit.
“I think there are cases where this may not be a bad avenue, but you have to be careful,” adds Jeff Leventhal, managing director and partner with HighTower, a financial advisory based in Bethesda, Md. Where it gets pricey, he says, is when customers don’t repay their items – they’ve effectively sold their valuables for less than market value. Before hawking personal items, he recommends exploring other avenues, including short-term financing from a credit card.
Another company, borro, caters to a more affluent crowd, with loans ranging from $1,000 to $1 million. “We don’t refer to ourselves as a pawn broker,” says Paul Aitken, CEO and founder of the U.K.-based company, which he launched in 2008, after making his fortune in mobile software. This year alone borro has done $30 million in lending.
Backed by $26 million in venture capital funding led by Canaan Partners, it began lending on this side of the Atlantic in early 2012; it expects U.S. lending to account for half of its business this year.
Rather than sell items at auction – and pay a 25% and 35% commission by Aitken’s estimates – cash-strapped folks can borrow anywhere from 50% to 70% of the value of their assets. They pay between 2.99% and 3.99% in monthly interest, depending on the value of the asset. The majority of clients pay back the loan within six months.
“We work with a lot of entrepreneurs and people who work in entertainment or sports,” says Aiktken. “The advantage of going this route is it’s highly discreet.”
In addition to being discreet, says Aitken, the loans are quick – with funds typically deposited within 24 hours – and there are no credit checks or dings on their credit for not paying back the loan. The business model isn’t predicated on customers letting go of assets. In fact, if borro ends up selling the collateral for more than the balance of the loan, they’ll refund the difference with interest.
Aitken argues that borro customers are sophisticated enough to understand the pros and cons of this type of lending. While some are borrowing to pay an upcoming tax bill or cover an unexpected business expense, many use this as a means to make more money, he says. “A lot of customers are small business owners,” he says. “They are high-risk takers who use their personal collateral to be opportunistic.”
Why not just call the bank? “It’s about speed, about being in control,” says Aitken. “And if something goes wrong, they’re not going to get a black mark on their credit rating.”