For decades, Edwin Pierce's Springfield business has flourished by helping cash-strapped people borrow money, but he fears he will soon be shutting down if legislation before the Illinois General Assembly passes.
The legislation would cap interest rates that pawn shops can charge at a 36% annual percentage rate.
"Pawnbrokers are not shy about exploiting a loophole that allows them to make predatory loans to our veterans as well as all other Illinoisans," state Sen. Jacqueline Collins, D-Chicago, said in a prepared statement. "I'm asking my colleagues in the legislature to close this loophole by voting for my bill."
The legislation she is sponsoring is Senate Bill 4241.
But Pierce, who owns Monster Pawn locations in Springfield, Bloomington, Normal and Peoria, said lawmakers just don't understand the economics of the industry or who pawn shops serve.
"People come to us when they have an emergency. They may have tapped out their relatives and have nowhere else to turn," he said.
The loans his shop offers are usually for a one-month period.
A person will offer an item, such as a piece of jewelry or a television, as collateral on the loan. They will bring the item into the shop where it will be stored until the loan is repaid. If the loan is not repaid, the broker can keep the item and sell it to pay off the debt.
"We're not giving people money based on their future earnings or a paycheck they haven't even gotten yet," Kelly Swisher, president of the Illinois Pawnbrokers Association, said. "We're giving them money based on something they already own. It's their property. They can do whatever they choose with it. And they can choose to use it to receive some money. And all that a pawn does is give them an option to get that item back by simply repaying what we give them, plus a service fee."
The service fees are the heart of the dispute between some lawmakers and the pawn industry.
Steven Mileham, a business partner of Pierce's, noted that the pawn industry is already regulated by the state.
"Basically, the pawn law is written so that we can't charge an interest rate of more than 3% (per month). But we're mandated by law to insure (the pawned item), store it in a clean, dry spot, and we're allowed to charge for all those costs," he said. "It's sort of like a loan initiation fee, and that comes out to about 17% – if we charge the full amount – we cannot go above that rate by law."
Pierce noted that banks and other financial institutions rarely give loans under $1,000. "It's just not worth the cost of the paperwork to do the loan," he said.
But a typical pawn loan is under $100.
"People say folks who come to pawnshops for loans are not financially sophisticated. I think they are very sophisticated," Pierce said. "They know if they don't pay their utility bill, they will have to pay a large fee to get it reconnected, but if they take out a pawn loan they will pay less. People come to us because they have nowhere else to go."
In 2020, the average income of a payday loan borrower was $37,582, according to data published by the Illinois Department of Financial and Professional Regulation.
Swisher said if interest rates, including fees, are capped at an annual rate of 36% as the legislation calls for, virtually all of the state's pawnshops will close.
Pierce said that is the case for his business. He owns Monster Pawn at 2324 MacArthur Blvd. and is creating a second location at 222 N. Grand Ave. in the building that was once the House of Music.
Swisher noted that unlike payday or title loans, a pawn shop loan does not hurt a person's credit rating if it is not repaid. Pierce added that the items that are pawned are almost always luxury items such as consumer electronics or jewelry.
State Sen. Steve McClure, R-Springfield, said he hasn't decided how he will vote on the legislation, which may be voted on in the January lame-duck session.
"I really haven't heard much from my constituents on this. I've had a few calls from pawnshop owners saying it's a bad idea and from others saying the interest rate should be capped. I don't like the idea of anyone being exploited. At this point, I just want to listen to what people have to say."
The Predatory Loan Prevention Act, which passed in 2021, capped interest rates on short-term loans for auto title, installment payday and payday providers at 36%. Because of a Sangamon County Court injunction in 2021 favoring pawn brokers, the PLPA's 36% standard does not apply to them.
But IPA's Swisher said pawnbrokers differ from other short-term loan providers in that customers can walk away from the loan.
Brent Adams of the Woodstock Institute, a Chicago-based economic development agency, said his group conducted an investigation of pawnshops across Illinois.
"We did an investigation in that we sent researchers into pawn shops as a kind of a secret shopper to test pawn shops on what they're charging. One of the findings was that in 19 out of 20 visits, the pawn shops charge 248% APR or more. ... The rate on a payday loan before the 36% rate cap went into effect was 297%. So, pawn loans are in the same camp as far as predatory interest rates, from our perspective."
But Pierce said it is unfair to annualize the interest rate.
"If you walked into a hotel and saw the cost of a room was $70,000, you would think that was outrageous. But people don't rent a hotel room for a year, they rent it one night at a time. Another way of saying $70,000 (a year) is $200 a night. In the same way, we don't make a loan for a year – we do it one month at a time."
Scott Reeder, a staff writer for Illinois Times, can be reached at [email protected].
