In an era of tight credit and a recovering economy, well-heeled borrowers face problems, too. Wall Street bankers need cash before the bonus check arrives. Heirs face estate-tax bills. Small-business owners have to pay for inventory up front.
Pawnshops that cater to affluent clients are opening new outlets to fill the niche. The firms make short-term loans to borrowers who own fine jewelry, expensive artwork or valuable sports and entertainment memorabilia, but temporarily lack cash on hand.
Such lenders say they fill a useful role. Borrowers who are asset-rich but cash-poor can avoid having to sell a prized possession in a hurry, which could mean getting less than it is worth. They also sidestep heavy paperwork or a credit check that might limit their ability to borrow from traditional sources down the road.
But the cost of convenience is a steep interest rate which can equal 2% to 4% or more of the loan amount a month, according to pawnshop lenders.
Borrowers also need to make sure their items are being appraised fairly, because loans typically amount to about half an item’s value.
Banks often have been tight with credit since the global financial crisis, which has given pawnshops—as well as a range of other lenders—a business opportunity, according to industry insiders.
Pawn loans are different from bank loans, which require a lengthier and more thorough underwriting process. Pawn lenders appraise the value of the asset the borrower is handing over and keep the asset until the loan is repaid. If it isn’t repaid, the lender sells or auctions the asset to cover the debt.
Clients of Citigroup’s C -1.80% private-bank unit can borrow against art holdings at a rate above the London interbank offered rate, but the minimum loan amount is $5 million, and the artworks backing the loan must be worth at least $200,000 individually and $10 million combined, a spokeswoman says.Some private banks will lend against unusual assets, but typically only for more-valuable items than even high-end pawnshops will accept.
By contrast, loans by high-end pawnshops tend to be in the $20,000 to $50,000 range, for items that are also usually of lower value, such as a watch valued at $100,000, according to pawnbrokers.
Suzanne Gyorgy, head of a Citigroup unit that works with wealthy bank clients who own fine art, says she recently referred someone who was having difficulty getting a mortgage to three collateral lenders who could make a loan against an art collection. The would-be borrower wasn’t a client, she says.
“There are so many more lenders popping up,” Ms. Gyorgy says. “They are filling that gap” for people who need a bridge loan.
Beverly Loan, a 76-year-old firm in Beverly Hills, Calif., last year opened a sister company, New York Loan, in Manhattan. New York Loan recently lent $110,000 to a real-estate investor who put up four Patek Phillipe watches as collateral, says Jordan Tabach-Bank, chief executive of both firms.
The borrower didn’t have enough cash immediately available for the down payment on a property he wanted to buy because the sale of another property he owned was tied up in escrow. When the sale closed, the borrower paid back the loan and reclaimed the watches, according to Mr. Tabach-Bank.
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Read the full article here: Wall Street Journal