Payday lenders stress pawn shops as downturn bites

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.

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.