William Roman wants to borrow money, but his bank won't lend him any more. So he's turning to his local pawn shop.
For Roman, a loan from the pawn shop is a lot easier to get. He doesn't have to fill out an application. The people at the pawn shop don't check his credit — all they want is something valuable, something they call sell if Roman doesn't pay them back.
"I've pawned laptops, PlayStations," says Roman. "If I'm not using it, then I'll just go and pawn it."
The main thing Roman pawns is his gold. Gold functions in the pawn-shop world much like houses did in the banking world: It's a valuable asset people can borrow against.
When the price for gold was high, pawn brokers were happy to have it. Their customers took out bigger loans, and they were able to charge more interest. But the price of gold has fallen rapidly this year, and that's left some pawn brokers in a bind.
"We made loans that we're holding for people that were made in, let's say, December, and in December, gold was $1,690 [an ounce]," says Emmanual Samuels, a pawn broker in Brooklyn. Today, gold is around $1,330.
Housing prices faced a similar decline during the financial crisis, and some banks that made loans against houses went out of business. But pawn shops aren't facing that kind of risk.
That's because pawnbrokers are pretty conservative. All the brokers I spoke to say they only lend amounts of up to 70 percent of the gold's value — meaning if your gold is worth $100 today, the most they'll lend you is $70.
Pawn brokers have a good reason to play it safe. They depend on their repeat customers.
They want customers to come back again and again so they can keep charging them interest. They want people like Roman to pawn a watch, pay back their loan and pawn it again.
DAVID GREENE, HOST:
All right. When you think of financial service companies, you might not think pawnshop. But pawnshop owners like Maurice Malin in the Bronx neighborhood of New York says they are providing a financial service, just to different customers than, say, a typical Wall Street bank.
MAURICE MALIN: People in our neighborhood need money. They can't go to a bank because there's no real credit behind them. So they bring in jewelry and we are their bank.
GREENE: But, as Lisa Chow from our Planet Money team reports, the pawn industry is facing a price collapse - a collapse in the price of gold.
LISA CHOW, BYLINE: William Roman runs a small cleaning company and occasionally he has expenses he can't make.
WILLIAM ROMAN: Like paying the cleaners or paying my phone bill.
CHOW: To make the payments, while many business owners might take out a loan from a bank, Roman turns to his local pawnshop. Now if you want a loan from a bank, the bank will look at your assets, check your credit, and charge you interest on the money they lend. Pawnshops also lend money to people and charge interest. The difference is there are no applications to fill out. Instead, you have to bring some form of collateral, so that if you don't pay back the loan, the pawnshop can sell your stuff.
ROMAN: I've pawned laptops, PlayStations. I pawn whatever I could. Like, if I'm not using it then I'll just go and pawn it.
CHOW: When Roman pays back his loan, he gets his item back. On this day, he's picking up a watch he pawned a month earlier.
ROMAN: Well, it's a Movado. And I only got 80 bucks for it, unfortunately. But it's my favorite watch.
CHOW: Watches aside, the main thing people pawn is gold. Gold bracelets, necklaces, rings.
ROMAN: I have a lot of gold. Well, it's all to him.
CHOW: At this point Roman points at his pawnbroker. Gold functions in the pawnshop world as houses did in the banking world. And recently, the same thing that happened with houses happened with gold. The price plummeted. Emmanuel Samuels is a pawnbroker in Brooklyn.
EMMANUEL SAMUELS: We made loans that we're holding for people that were made in, let's say December, and in December gold was like $1,690.
CHOW: One thousand-six hundred-ninety dollars an ounce - nearly 30 percent more than gold's current price. Banks faced similar declines in housing values during the financial crisis. The banks, a lot of them, went out of business. Are pawnshops going out of business?
CHOW: That's because pawnbrokers have always been more conservative. Of the ones I spoke to, nobody said they lent amounts greater than 70 percent of gold's value. That's like the entire banking industry demanding a 30 percent down payment on every house. Pawnshops, they don't want you to default. They want you to pawn your ring, pay back your loan, and then pawn your ring again.
SAMUELS: I have people that pawn the same items for 10 years, over and over. Every time they have a problem, here they come. Then when they have some money, they pick it up. Two, three months later, here they are back again. Those are the best customers.
ROSA LEVY: No. I've never lost my jewelry. In the 10 years that I've been here, I've never lost my jewelry.
CHOW: Rosa Levy is one of those customers. On this day she's picking up her husband's 14 karat gold ring and paying back the $70 she borrowed six weeks ago, plus the $10 of interest and fees. I had seen Levy the previous day, dropping off another ring to borrow 50 bucks. She says she used that money for cab fare to bring her husband home from the hospital.
JAY ROSADO: I think she has six loans in total.
CHOW: Jay Rosado is Levy's pawnbroker. He says something that a lot of people told me. During the recession, when gold prices started rising, default rates went up because people could borrow so much more money with their gold.
ROSADO: Some people start thinking of, OK, if I get this amount of money, now I get $500 more. I can do so much more. But they don't realize that you have to pay back that loan. The interest on $1,000 is not the same as the interest in $500.
CHOW: Rosado says his default rates nearly doubled during the boom. More than half of his customers never picked up their gold and so Rosado sold it. Now default rates are back to normal. And unlike banks who'd like to see housing prices go back up, Rosado says he'd like g old prices to fall even more so that his customers can start buying gold again. Because more gold out in the market means more stuff to pawn. Lisa Chow, NPR News. Transcript provided by NPR, Copyright NPR.