While the U.S. grapples with a shaky economy, many people here increasingly are turning to one of the oldest professions to fill some of their more humble financial needs. Theyre putting up everyday items as collateral and obtaining short-term cash loans from pawnbrokers, who fill a niche for such customers.


You do see more people when the economy gets softer, says Gary Singer, third-generation owner of Dutchs Inc., a pawn store at 415 W. Main in downtown Spokane. When times are really good, people dont need loans as much.


Lending in the pawn business is countercyclical, says Singer, who expects business to pick up even more this year as talk of the slowing U.S. economy continues.


Doug Karlson, who owns and operates Axels Pawnshop, at 3301 E. Sprague, with his brother, Larry, through a company called Karlson Investments Inc., says Axels is writing more loans right now, and is selling more pawned items, too.


Larry Karlson says increases in utility rates or fuel prices often trigger surges in the loan side of Axels business. He says customers occasionally come in to borrow money for car or mortgage payments, but generally people with credit on a house might have some other options.


Singer says his customers are more likely to need money for rent, car repairs, or necessities like coats for their children, than for mortgage payments.


Larry Karlson says most pawn customers are working or in a seasonal layoff, and they have some assets, but not much credit. Though he says many now have debit cards, they dont have the bank balances to back them up.


Were a community bank. Theres no question in my mind that we are important. We are a small community bank, says Mark Lax, president and owner of Pawn 1 Inc., a Spokane-based chain of a dozen pawn stores. Lax says Pawn 1s business is growing, and he plans to open six more stores in Idaho over the next three to five years.


As much as pawnshop operators are small-time lenders, they also are, by necessity, salespeople, since the nature of their business results in an inventory of defaulted loan collateral. Ken Craudell, who manages a pawnshop at 3030 E. Sprague for Spokane-based Double Eagle Inc., which also operates a second store in Deer Park, says that when the economy is tight, Double Eagle typically experiences an increase on the sales side of its business in addition to making more loans.


Larry Karlson says an economic downturn causes more people to consider buying used merchandise, such as televisions, rather than new merchandise. He says in some years Axels has loaned as much as $1 million, though business has been softer the last couple of years. Karlson says Axels has annual sales of between $300,000 and $400,000.


Karlson says the terms of pawn loans are strictly regulated by Washington state law, which defines the maximum allowed fees and interest and the minimum length of time for a loan. He says that on a $100 loan, for example, there is a $16 loan origination fee, and $3 in interest accrues every 30 days, so at the end of 90 days, which is the minimum time a pawnshop must give a borrower to repay a loan, the total cost to the borrower for the loan would be $25.


As a percentage rate its high, but as a dollar amount its not that high, Karlson says. If the loan isnt paid off, the item becomes the property of the pawn shop, which puts the item up for sale.


Collateral for such loans comes in all shapes and sizes, from musical instruments to moose antlers.


If it doesnt eat and you can fit it through the door, you can pawn it, but only if the shop operator believes he could sell it if he had to, Singer says.


It gets down to the very basics of what somethings worth, says Singer. Its hard to make a loan on sentiment.


Craudell says firearms and jewelry tend to have the highest value for loans. He says the most Double Eagle usually loans at one time is about $300. Singer says his loans mostly are for around $100.


Were here to make the smaller loans, Craudell says. He says his company charges a lower interest rate and smaller fees on larger loans than on smaller loans.


The more money a pawn shop loans, the less likely a customer is to default on a loan, Karlson says. He says his customers most often reclaim their assets within the 90-day term of a loan. He says the default rate on pawned items is about 15 percent, with up to half of customers failing to reclaim collateral from smaller loans of say, $10. On loans of $100 or more, however, the default rate is only about 5 percent.


Craudell says he anticipates about a 40 percent default rate on the 40 to 80 loans that the Double Eagle store he manages makes each day. Singer says 85 percent to 90 percent of the items pawned at his shop get reclaimed.


Craudell says items of less value typically are electronics, which depreciate rapidly. He says when new electronics technology is introduced, the business experiences a spike in defaults on equipment that has become obsolete.


Despite the important service pawnbrokers claim they provide to working people who often cant secure credit in more traditional ways, the trade struggles with unfavorable public perceptions. Yet, store operators here contend the pawn business is the most-regulated type of business in the state.


If you have people knowingly trafficking in stolen property, they arent setting up long-term brick-and-mortar businesses, Larry Karlson says.


Singer likens trying to dispel misperceptions about the industry to trying to bail out the Pacific Ocean with a bucket.


Spokane County recently expanded its pawn ordinance to begin enforcing those regulations at second-hand dealers in unincorporated areas.


Despite the heavy regulation, Spokane has a lot of pawn stores per capita, Karlson says. He estimates there are about 25 pawnbrokers in the Spokane area and says about as many pawn shops operate in downtown Spokane as in far bigger downtown Seattle.


Of the pawn stores here, most are small, family-owned businesses, Karlson says. Thats how the Pawn 1 chain began 30 years ago, Lax says. Singers family has operated Dutchs since 1915, and Larry Karlson started Axels with a third brother and his father in 1990. Double Eagle is a family-owned business also.


Pawn 1 has grown to be one of the largest pawn-store chains in the area, with 125 employees at a dozen stores in Washington and Idaho. Its revenues have tripled over the last three years, Lax says.


Lax doesnt directly correlate higher sales to the weak national economy, but expects both sales and loans to increase if economic pressures keep seasonal workers out of work. He says unemployment is usually the biggest notable factor that affects Pawn 1s stores.


Larry Karlson is the Spokane-area representative to the Washington State Pawnbrokers Association, which he says currently has about 70 members. The association retains a lobbyist to track state legislation, and its members belong to the National Pawnbrokers Association, which employs a lobbyist at the federal level.


The payday-loan business has taken a bite out of the collateral loan market here, some local pawnbrokers say.


Its competition, says Singer, but he asserts that pawnshops make straightforward loans that dont damage the borrowers ability to get cash in the future even if they dont repay the loans. He contends that payday-loan establishments are less likely to offer another loan to someone who defaults, whereas if his customers dont reclaim items against which he has loaned them money, because he can sell their collateral, he can still offer them loans later.


Some pawnbrokers have responded to the competition from payday lenders by making such loans themselves.


Karlson says Axels offered payday loans for a time, but didnt like having to pursue collections. He says he prefers being able to keep a relationship with his customers even if they cant repay a loan.


Theres no credit check, it doesnt affect their status with me, its not a problem if they choose not to redeem their collateral, Karlson says.


Pawn 1 does a lot of vehicle-title loan business in its Idaho stores and services those loans from any of its locations in Washington or Idaho, but cant originate such loans in Washington, where theyre banned, Lax says. In that business, a customer uses the title to a car as collateral against short-term loans that are usually around $500, Lax says. Pawn 1 makes each loan for a 60-day period, and allows one extension, but most of the loans are paid off within the first 30 days, he says.


For most pawn stores, the sales side of the business is as important as the loan side and generates similar revenues. In Dutchs, for example, the blue neon sales sign is hung right next to the red neon loans sign.


Many pawn stores take it a step further and emphasize a product line, too. For example, Axels has a reputation for selling tools, Larry Karlson says.


His store has about 6,000 square feet of floor space, and he says a shops size often dictates to a large degree what the store specializes in, with smaller stores leaning toward jewelry as an emphasis.


Singer says more than half of his business comes from repeat customers.


You see the same people with the same items, he says. Singers store has emphasized music and has an instrument repair shop on site. He says it has gravitated toward that inventory emphasis because many musicians are strapped for cash at one time or another.


Karlson says that people who are truly desperate for money arent the typical pawn store customer.


We have a lot of loyal customers too, that, this is how they operate. They come in several times a year, and most are very comfortable with this, he says. Theres a whole group of people out there who use pawn shops for purchasing and loans both.


Contact Jeanne Gustafson at (509) 344-1264 or via e-mail at jeanneg@spokanejournal.com.