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Brazil’s Middle Class Finds a Lifeline at the Pawnshop

Brazil’s Middle Class Finds a Lifeline at the Pawnshop

Posted by Juan Gavasa on December 04, 2014

Interest rates in Brazil would make an American loan shark blush. Credit cards charge more than 240 percent a year. Bank loans top 100 percent. For a rising number of consumers in need of cash, a pawnshop is actually the better option.

When Angela Pereira, a stay-at-home mother in São Paulo, needed extra money to buy her daughter school supplies, she pawned a gold chain to get 530 reais, or about $210. Adjusting for the country’s high inflation, she is paying interest of around 19 percent a year, only modestly higher than what the average American pays on a credit card.

“It’s accessible and cheap,” she said.

The growing prominence of pawnshops is the latest sign that the country’s consumer debt binge may be reaching its limit. The swelling Brazilian middle class — and its shopping habits — helped feed the broader economy for years. But growth is slowing, and consumers are struggling to pay their bills.

The weak economy was a flash point in the recent election, with the incumbent President Dilma Rousseff narrowly winning in a recent runoff. The central bank increased interest rates again, in an effort to fight inflation. But that could weigh on growth and further complicate the consumer debt landscape.

While still a relatively small portion of lending, the pawnshop business has been booming, even as other types of loans have fallen out of favor. Some Brazilians, even those solidly in the middle class, are using pawnshops to pay off their credit cards, cover unexpected expenses or just get a cheaper line of credit.

Carmelita Valente, left, has used her pawn account, guaranteed by jewelry, as a line of credit since her husband died. Paulo Fridman for The New York Times

Unlike in the United States, pawnshops in Brazil are regulated at the national level. Instead of being independent players that set their own rates and make their own rules, pawnshops are operated by a government-owned bank, Caixa Econômica Federal.

The strict oversight is the legacy of the former Brazilian President Getúlio Vargas, a strongman who took power in the 1930s in a military coup and showed sympathy for European fascism. But he also introduced progressive reforms, including the eight-hour workday. As part of his attempt to lower interest rates, he abolished private pawnshops in 1934 and gave the monopoly to Caixa.

Like those of any other bank, Caixa’s branches have walls of A.T.M.s; desks for new savings accounts, mortgages and loans; and rows of tellers for deposits and withdrawals. But in 463 of Caixa’s branch offices, one row of tellers has scales and jewelers’ kits to weigh and test precious metals, jewels and luxury watches.

After the inspection, the teller immediately offers a loan, generally equal to 85 percent of the item’s value. The teller does not ask about employment, income or credit history — just name, address and tax ID number.

João Régis Magalhães, Caixa’s national superintendent of consumer finance, said it was logical that pawn loans should charge lower interest rates than other loans: “The operation is simple, so we have very few costs, and the risk is very low because we have a guarantee that we will get our money back.”

The growth in pawnshop lending in some ways follows the broader boom in household debt. From June 2004 to June 2014, consumer credit in Brazil rose 658 percent to $297 billion, according to the country’s National Association of Executives in Finance, Administration and Accounting. Caixa’s pawn loan portfolio has more than doubled in the last four years to $670 million, with 1.3 million loans outstanding.

The fallout from the credit binge has been more painful for other types of loans. The central bank reports that 6.7 percent of personal bank loans and 26.3 percent of credit card accounts are in default. By comparison, Caixa said that only 0.6 percent of pawn customers missed their payments.

While other types of lending have slowed, pawn loans continue to rise rapidly. Caixa is planning to double the number of branches that offer such loans by the end of 2015.

Marianne Hanson, an economist with the National Confederation of Commerce, said many low-income households, for whom credit was a novelty a few years ago, “are now learning how interest works and that they have to look for the cheapest alternative.” Credit that requires some kind of collateral, like a pawn loan, fits that bill, she said. And even middle-class households are turning to pawnshops to try to break the cycle of debt.

At the start of the decade, Arianna França, an event coordinator for the São Paulo state court system, faced a medical emergency. Her father’s health insurance did not cover all the procedures needed to treat his cancer.

As a civil servant, Ms. França has the option to use so-called consigned credit. On such loans, the borrower’s employer automatically deducts the amount owed each month from the borrower’s paycheck, and the rate is about the same as on pawn loans.

But like many other civil servants and pensioners, Ms. França was already spending more than 30 percent of her income on consigned-credit payments — the limit permitted by law. “There’s so much credit available, you can just buy and buy. It can become a problem,” she said.

Her credit cards were soon maxed out, too. Brazilian credit cards’ minimum monthly payments are often not large enough to keep the amount owed from growing. So two years ago, she pawned her jewels and raised 40,000 reais to pay off her credit cards. The interest is low enough that she is now paying down her principal and expects to have her jewels back next year.

While pawn loans can provide a much needed lifeline, they also pose risks.

For years, Valéria Ferraz, a holistic therapist in São Paulo, has pawned her jewels to help pay the bills when business is slow, then redeemed them when clients return. “It becomes addictive,” she said. “It’s so easy to get extra money, sometimes I do it even if I don’t really need it.”

Ms. Ferraz admitted that she had once lost a gold ring with diamonds because she had failed to make her interest payments. When a consumer defaults, Caixa displays the pawned item on its website. Interested parties bid through the bank’s A.T.M.s. If the amount raised in the auction is greater than what the client owes, the client receives the difference. But because Caixa values jewels based only on their raw materials, without taking craftsmanship into account, the auction price rarely reflects the full value.

Reinaldo Domingos, president of the Brazilian Association of Financial Educators, said pawn loans might be cheaper than other options but they are still not cheap. “For many people, the snowball of debt keeps growing,” he said. Yet for those who keep their borrowing under control, pawn loans can replace high-interest credit cards.

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