Why are millennials using payday loans and pawn shops?

NEW YORK (Reuters) – David, 31, was in a rush. He was building a second location for his family’s jewelry store in Queens, New York and was strapped for cash. He turned to a local pawnshop for financing to complete the construction, a decision he now regrets.

A woman walks into a pawnshop announcing a sale, in Los Angeles, January 26, 2009. REUTERS / Lucy Nicholson

“It was too difficult to get a bank loan,” said David, who is married and educated at university. He said he was treated fairly by the pawnshop he used, but said, in retrospect, the stress of pledging 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 by PwC and George Washington University found that 28% of millennials who graduated from college (aged 23-35) sought short-term funding from pawn shops and money lenders. salary over the past 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 strata. But the borrowers of the pawn shops and pawn shops are often young, middle-class adults, struggling to navigate their way into the real post-graduate world without financial assistance from the Bank of Mom and Dad. , according to Shannon Schuyler, director of PwC and head of corporate responsibility. officer.

“Maybe that’s part of the helicopter parenting trend,” says Schuyler. “They have a lifestyle that they’re used to, and they don’t realize what it costs.”

Many borrowers already have huge student loan debt as well as college credit card balances.

LIVING ON THE FINANCIAL EDGE

The study also found that nearly half of Millennials couldn’t find $ 2,000 if an unforeseen need arose the following month. Almost 30 percent are overdrawn on their checking accounts. More than half (53%) had a credit card balance in the past 12 months.

Eric Modell, owner of the “David” pawnshop chain, said that one of the reasons millennials turn to pawn shops is that the process doesn’t hurt a borrower’s credit rating like other types of loans could do that.

“They worry about the impact a lower credit score might have on their job or their ability to get a mortgage when they need it,” Modell explains.

Plus, a pawnshop transaction only takes a few minutes, he noted. “It’s an easy resource,” Modell added. In contrast, bank loans can be time consuming, involve a lot of paperwork, and can be expensive to set up.

Nationally, the average loan from pawnbrokers is around $ 150, according to the National Pawnbrokers Association. What you can pledge and the cost of borrowing vary by state. In New York, for example, interest rates are capped at 4% per month, with a maximum additional charge of $ 10.

Modell said borrowing small amounts of money for a short time, even at higher rates, to avoid charges like a bad check or late bill charges, can often be a better decision.

Doug Boneparth, certified financial planner and partner of Life and Wealth Planning in New York City, said he didn’t like the fact that so many millennials were strapped for cash.

“This unfortunately could be an indication of how difficult it is for millennials to save,” Boneparth said.

Bonparth said he advises millennials to consider other funding 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 were asking questions. This is why the discretion of a pawnshop 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 pawnshop, which puts him under stress. “The money is just thrown down the drain,” he said.

Editing by David Gregorio

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