Trying to get hold of cash quickly is increasingly difficult these days – as the credit crunch has ensured that new mortgages, loans and credit cards are much harder to come by.
But with mainstream borrowing a challenge, the pawnbroking, cash converter and pay-day loan industry is booming. The UK's largest pawnbrokers Albermarle & Bond announced pre-tax profits of £10.3m in 2008, up 47 per cent in the past 12 months. Regulation is starting to creep in, and these days the brightly lit stores are on prominent high streets. Customers include everyone from low income families to professional footballers and City high flyers, but do they really deserve a place among mainstream financial solutions?
Just a pawn
Go to a pawnbroker and they will offer you a loan with an interest rate or a flat fee. But you'll have to leave something valuable behind to act as security. Traditionally, this could have been anything, (Dickens is said to have pawned his furniture to keep his father out of prison), but these days it's usually jewellery, particularly gold and high-end watches.
The pawnbroker will value the customer's security item, then ask them to sign a credit agreement, which customers should only sign once they've read it and if they agree to the terms. There's also a pawn receipt, either as part of the credit agreement or separately, which you will have to hand over along with any money you owe to get your valuables back. Keep this paperwork safe, as this is proof you own the item, and you could have real difficulty recovering your possessions without it. The pawnbroker may even refuse to give your item back altogether.
You don't even need to go into a pawnbroker's shop. Online pawnbrokers, such as Borro.com, operate in the same way as high-street lenders, but simply courier items between the customer and the pawnbroker's safe.
"A few years ago, the average loan would be around £120," says Nathan Finch, the director of Pickwick Pawnbrokers. "Today that averages around £150. Customers are borrowing slightly more but that is partly because the value of gold has gone up. The loan value is usually around 50 per cent of the value of the item. So if we were to sell a £200 necklace in our window, the loan we offered to the customer would be around £100."
Borrowers usually have six months to pay off their loan and recover their item. Many pawnbrokers suggest that around 80 per cent of their customers repay their debts and recover their security items. But if you can't afford to repay your debt, and you borrowed £75 or less, the pawnbroker will keep your pawn, according to warnings from the government's Consumer Direct advice service.
For loans worth more than £75, the pawnbroker can sell the pawn to recover the debt. The pawn is yours until it is sold and you can still redeem it by paying what you owe, including the interest that has built up. If you cannot pay what you owe by the deadline, the pawnbroker may keep or sell the item.
There may be the chance to renew the agreement, but if the broker decides to sell the pawn to recover the debt, you will still have to pay the difference if the sale doesn't cover it. If it makes more than the loan amount, the pawnbroker must hand over any surplus, but you don't automatically receive that cash. If your item is sold, it's always worth following up with the pawnbroker to check you're not out of pocket.
The real sting for consumers is the interest rate. Like a bank, a pawnbroker makes money on the interest for the loan. But unlike banks and building societies, whose unsecured loan rates average 9 per cent APR and whose average overdraft rate is 19.1 per cent, according to price comparison site Moneysupermarket.com, a pawnbroker's interest rate is often 7 or 8 per cent a month, equivalent to around 101 per cent APR, says Finch. "If you want to borrow a large sum of money for a long period, a pawnbroker probably isn't the best choice. But if you need a small sum for a few weeks with no extra fees or charges, you could consider a pawnbroker."
Crucially, all consumer lending is covered under the Consumer Credit Act, including licensed pawn broking, and pay day loans. Consumer Direct offers more information on your rights at tinyurl.com/azex8x. "It's expensive, but at least pawn broking is regulated and you have a form of redress," says Frances Walker, spokesperson for debt charity the Consumer Credit Counselling Service. "People have to understand what the price is and the fact that you can lose your possessions. If you can get credit elsewhere then it's worth pursuing that first. But for those with very poor credit ratings, it's better than pay day loans or and unlicensed, unregulated internet-based lending."
Pay day loans
Many pawnbrokers also offer pay day loans, which cater for the same customers who need money and can't wait for their salary. The average loan is around £330, and you can usually borrow around £750. Although some lenders will ask for collateral security, pay day lending is usually based on the customer writing a post-dated cheque for the total loan amount, plus a fee. The lender cashes the cheque the next time the customer's salary is paid. Again, lenders make their money from the charges associated with the loan. Online lender Pay Day UK, offers loans of up to £750, but borrow that much and you'll have to repay £937.50, which works out at a huge 1,737 per cent APR. But that's by no means the most costly. Quickquid's average rate is a mind numbing 2,356 per cent APR. Compare that cost with the average interest rate on credit cards of around 18 per cent, which are themselves considered one of the most expensive ways to borrow money.
The real problem with these is that if you can't repay the loan in time, it rolls over, and the fee is added again," adds Ms Walker. "A £50 fee every month for the same loan is a lot of money for people with low incomes. If you need credit and can't get it on the high street, go to a pawnbroker rather than a pay day lender."
"Cheque cashing and pay-day loans are very different products," warns Geoff Holland, chief executive of the British Cheque Cashers Association. "Cheque cashers encash third-party cheques for those who either don't want to pay them into a bank account, or don't have one." Once a cheque-cashing company has verified your identity and the validity of the cheque, the cost of this kind of service varies depending on the local market and the reliability of the cheque. This can either be a flat fee per cheque or this fee plus a percentage of the value of the cheque, usually between 4 and 7 per cent, according to Holland – although this can be far higher. This isn't the interest rate on a loan. It's essentially a fee for converting your money from one form to another.
"No one makes a living out of cashing cheques," Holland adds. "It's always an add-on service for other minor financial services, and business has decreased dramatically because a lot of cheques came from the construction industry and from the immigrant community."
The other major difference between this service and other quick cash alternatives is that because cheque cashing isn't a loan, it isn't covered under the Consumer Credit Act.
Some pawnbrokers also offer "sale and buy-back" schemes, under which you sell an item to the lender and can then buy it back at a higher price after a few weeks or months, or by instalments – known as set aside or lay bys. But like cheque cashing, there isn't the same level of consumer protection for these kinds of deals as there are on regulated credit agreements, because they are not actually loans.
Lending laws: Know your rights
Since 2006, the Consumer Credit Act has applied to all consumer lending, from bank loans to payday loans. That means that if you believe your credit agreement with a pawnbroker is unfair you can challenge it in the small claims court and get help from the Financial Ombudsman Service (FOS).
"Pawnbroking and pay-day loan regulation is less than two years old," says Martin James of the FOS. "But since these services have been brought under the consumer credit act, we've had an exceptionally low complaint level – only one or two every month.
"We've worked hard to get the message out that these services are now regulated, so I would be surprised if this low level was because customers were unaware of the available complaints procedure. When we do get them, complaints are really about a lack of communication and are solved very quickly.
"Most of the time, we simply mediate between the pawnbroker and the customer, in which case the problem can normally be resolved in a few days or weeks. If we have to investigate, it can take between three and six months to reach a conclusion."
Anyone who believes their credit agreement is unfair should contact their loan provider in the first instance, regardless of whether that provider is a bank or a pawnbroker. The lender has eight weeks to respond or resolve the problem and, if you're still not happy, the FOS can get involved.
For more information about the FOS complaints procedure go to http://www.financial-ombudsman. org.uk/consumer/complaints.htm.