As you may remember, the financial crisis caused a lot of credit card issuers to crack down on the credit quality of their portfolios--lowering credit limits, denying new applications, even cancelling cards, even though the customers weren't yet delinquent.  Meanwhile, the other traditional recourse of the financially troubled family, the home equity loan, was impossible in most cases because home values had dropped so far.  Arguably, this trend is now being exacerbated by rules which are intended to protect consumers, but which also make credit more expensive.


This has proved a boon for the pawnshop industry, which is experiencing terrific growth as other credit markets contract:

Pawnshop respectability surged when the economy faltered, noted the National Pawnbrokers Association's Murphy. He says pawnshops serve the middle class who were cut off from credit, as well as the millions of Americans who don't bank and have no checking or savings accounts. Murphy says pawnshops also reported during the downturn that restaurant owners were trading in jewelry to make their payroll.

Pawnshop and quick-loan centers fill a market niche because most community and regional banks view working-class clients as risky borrowers and don't want to deal with small loans. Coffey sees these pawn chains continuing to grow, since banks likely won't encroach on their territory.

In fact, Coffey says EZCorp and Cash America operate like regional banks. They set up a branch system and train their employees to make hundreds of small loans and determine the right value for each loan without overpaying for the item.

Managing store growth is critical to pawnshop growth, Coffey says. "The dynamic for value creation is the same that drives a retailer," he said. Staying ethical, explaining the loan fully, and maintaining the pawnshop's new clean reputation are also keys.

Reputation, says author Gaines-Ross, fuels a firm's growth. "The reputation is a company's competitive asset; it affects a big portion of a company's bottom line," she said.

Consumers on limited incomes have two features that make them unattractive to lenders: they are more likely to default (and lack assets to seize if they do default), and there are a lot of them, doing a lot of very small transactions.  High transaction costs on small deposits or loans make these accounts less profitable, something bankers make up with a combination of fees and higher interest rates.  Ban these, and the bankers will do their best to shoo these customers away.

Is it necessarily a bad thing that pawnshops are replacing credit cards?  One could argue both ways--if people can't pay the pawnshop, they lose their stuff.  On the other hand, the interest rates are competitive, and certainly better than payday loans, for which even nonprofits charge interest rates in the range of 300% to cover the transaction costs and the risk of default.  And having a pawnshop sell your stuff doesn't, as far as I know, put a ding on your credit history.

Of course, many people would argue that the clients of these lenders would be better off not borrowing money at all.  My take on the research is that this is true--for a minority of the customers.  Most of the customers are better off, because they've avoided an emergency like a broken car, an overdraft fee, or an eviction, that would have put them in much worse straits than the loan.  Most of the people who take these loans seem to be pretty severely credit constrained, so there aren't really better credit options for them.

 It would, of course, be much nicer if people never got into those situations.  But you cannot will such a world into place by banning one of the symptoms of financial insecurity.

We want to hear what you think about this article. Submit a letter to the editor or write to letters@theatlantic.com.