Pawn shops cashing in

By Supantha Mukherjee - Analysis

BANGALORE (Reuters) - Bad credit? Need money now? Just grab that electric guitar in the corner and head for a pawn shop. Cash-strapped consumers are swapping jewelry, music systems and electronic gadgets for cash like never before.

"The pawn transaction is a very simple, no-questions-asked secured loan that's working very well for people," Sterne Agee analyst Henry Coffey said.

U.S. payday lenders, who make small, short-term loans against the borrower's next paycheck, are investing more in their pawn operations as stricter regulations and rising unemployment make their primary business less attractive.

Lenders like Ezcorp Inc, First Cash Financial Services Inc and Cash America International Inc have seen lower profits on the payday front but strong results from their pawn operations.

Compared with payday loans that carry sky-high interest rates -- sometimes even more than 300 percent -- pawn loans are easy on the pocket and do not have to be repaid if the borrower decides to forfeit the collateral.

Companies are pouring capital and managerial resources into their pawn products, which are growing at a rate not seen in the past 10 years, Coffey said.

Much of the shift in emphasis has been spurred by regulators who are trying to curb the interest rates charged by payday lenders.

The Ohio Legislature passed a bill last year to effectively cap the interest rate on payday loans at 28 percent, a blow to payday lending centers in the state.

Fort Worth, Texas-based Cash America closed 42 stores in Ohio, and on Thursday it reported a drop in fourth-quarter profit and lowered its 2009 earnings outlook.

Some other states are moving to cap interest rates at 36 percent.

"I think there's going to be a lot of noise regarding that," said Stephens Inc analyst David Burtzlaff.

"The 36 percent interest rate caps have been talked about a lot, and you can't operate at that rate. Simple math won't allow it, given the loss rates these companies experience on the product."

Analysts also expect the payday lending sector to face resistance from U.S. President Barack Obama, who called for caps on interest rates and improved disclosure during his campaign.

"It poses more of a risk than earlier, but given the environment I don't know whether he (Obama) will take away the last consumer credit option right now," Burtzlaff said.

To overcome earnings shortfalls on the payday front, the companies have turned to expanding their pawn operations.