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 "It was too hard to get a bank loan," explained David, who is
married and college-educated. He said he was treated fairly by the
pawn shop he used, but said that, in retrospect, the stress of
pawning jewelry from his inventory was not worth it.
Millennials like David have become heavy users of alternative
financial services, primarily payday lenders and pawn shops. A joint
study from PwC and George Washington University found that 28
percent of college-educated millennials (ages 23-35) have tapped
short-term financing from pawn shops and payday lenders in the last
five years.
Thirty-five percent of these borrowers are credit card users.
Thirty-nine percent have bank accounts. So, in theory, they should
have other options to access cash.
There is a stereotype that users of alternative financial services
are from the lowest income strata. But borrowers from pawn shops and
payday lenders are often middle-class young adults, struggling to
make their way in the post-college real world without financial help
from the Bank of Mom and Dad, according to Shannon Schuyler, PwC
principal and chief corporate responsibility officer.
"It may be part of the helicopter-parent trend," Schuyler says.
"They have a lifestyle they are used to, and they don't realize what
things cost."
Many borrowers already carry huge debt loads from student loans as
well as credit card balances racked up in college.
LIVING ON THE FINANCIAL EDGE
The study also found that nearly half of the millennials could not
come up with $2,000 if an unexpected need arose in the next month.
Nearly 30 percent are overdrawing their checking accounts. More than
half (53 percent) carried a credit card balance in the last 12
months.
Eric Modell, owner of the pawn shop chain "David" used, said one
reason millennials are turning to pawn shops is that the process
does not hurt a borrower's credit record the way other kinds of
loans might.
"They worry about how a lower credit score could impact their job,
or their ability to get a mortgage when they need it," Modell says.
In addition, a pawn transaction takes a matter of minutes, he noted.
"It's an easy resource," Modell added. By contrast, banks loans can
take time, involve lots of paperwork, and can be expensive to set
up.
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Nationally, the average pawn shop loan is about $150, according to
the National Pawnbrokers Association. What you can pawn as well as
the cost of borrowing varies by state. In New York, for example,
interest rates are capped at 4 percent per month, with an additional
$10 maximum fee.
Modell said borrowing small amounts of money for a short time, even
at higher rates, to avoid fees like a check bouncing or a late fee
on a bill, can often be a better move.
Doug Boneparth, a certified financial planner and partner at Life
and Wealth Planning in New York City, said he does not like the fact
that so many millennials are cash-strapped.
"This, sadly, could be an indication of how difficult it is for
millennials to save," Boneparth said.
Boneparth said he advises millennials to look at other financing
options, even if they are not ideal. For example, ask a family
member for help. He also suggested taking out a loan from a 401(k),
if possible.
But families would ask questions. That is why the discretion of a
pawn shop and other alternative financial service providers is so
appealing, Modell said.
As for David, he still owes about $16,000 on his loan from the pawn
shop, which is stressing him out. "The money is just getting flushed
down the drain," he said.
(Editing by David Gregorio)
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