Pawn shops are beckoning from the shadows.
At a time when banks have shut their doors on those with bad credit, a growing number of borrowers are pawning jewelry, electronics, and other valuables to make ends meet.
Consumer advocates say the development is worrisome because the interest rates on loans from pawn shops can be as high as 20 percent a month. But pawn shop operators say they provide a critical lifeline to a group with few options.
“It’s a short-term loan - it’s designed to bail someone out and be done with it,’’ said Ed Bean, who owns Suffolk Jewelry & Pawnbrokers in Boston.
A common misconception is that pawn shops simply buy the various knickknacks that customers bring in. But the more lucrative aspect of the industry is issuing loans against those belongings. Customers often prefer borrowing over selling because it lets them hold onto what may be their only tickets to cash in the future.
What’s key about loans from pawn shops is the lack of judgment; a credit check isn’t required and the loans don’t affect credit scores. A transaction takes just a few minutes in many cases.
A pawn shop owner simply eyeballs the merchandise a customer brings in and offers a loan amount on the spot. If the customer repays the loan within 30 days, the belongings can be reclaimed. The customer can also opt to extend the loan; many borrow against the same items over and over.
If a customer fails to repay the loan, the shop can put the collateral up for sale.
The National Pawnbrokers Association says its members are reporting record growth as a result of persistently high unemployment, coupled with soaring gold and metal prices.
The group says the popularity of the shows “Hardcore Pawn’’ “Pawn Stars’’ is opening up the industry to a broader customer base, as well.
The interest rates pawn shops charge vary, depending on the state. In New York City, the cap is 4 percent a month. In the South, where loans tend to be smaller, with many customers bringing in items such as power tools or lawn mowers, caps can be up to 20 percent. Storage fees may also apply.
Such costs are why pawn shops should be considered a last resort, said Jean Anne Fox of the Consumer Federation of America.
Loans from pawn shops can also hook users into a cycle of debt because those living on tight budgets are prone to extending loans if their financial situations don’t improve, Fox said.
Even though going to a pawn shop may seem expensive to those with good credit, Bean said it’s a way for many to keep the lights on.
“It’s still the business that it is, and it can’t be picture perfect,’’ he said. “We’re not a genteel jewelry shop. But people can come in and expect that it will be efficient and we will be polite.’’