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Tickers in this Article: CSH, EZPW
Banks and credit cards may be the most common sources of funds for people in need of money, but they are not the only source. Alternative credit companies (pawnshops and payday loans specialists) are becoming more and more popular given the time, paperwork and restrictions that go with obtaining a traditional bank loan.

Now, I know what you are wondering... is this legal, and is it even possible to invest in a company that specializes in alternative credit? Yes, and yes.

How Pawnbrokers and Payday Loan Companies Work

Banks are terrific sources of funds. Most of us would have trouble purchasing a car, home or many other items without their valuable services; however, there are times when the amount needed is so small, or the time the money is needed so short that it may not make sense to go through the trouble of filling out extensive paperwork and having to wait long periods for an approval.

Enter pawnshops and payday loans.

Pawnshops are a place where you can take an item of value (such as a piece of jewelry) and obtain a loan against that item. Some would argue that pawnshops prey on individuals that are down on their luck, but in general they do provide a valuable service.

For example, suppose someone needs to obtain a short-term loan of $200 to pay a utility bill that's due in two days. Going through a bank may not be practical. However, in a pawnshop, loans can often be made in a matter of minutes as the pawnshop operator will simply calculate what the item is worth (often via computer these days) and then generate and sign formal loan papers.

What happens next? The customer must then repay the loan (with interest) at which time he or she will be given back the property, also known as collateral. What happens if the person cannot or does not repay the loan? Simple. The pawnshop retains and then resells the item.

Another financing tool that has become fairly popular is the payday loan. A payday loan is a short-term loan that consumers often use to pay short-term debts. However, rather than pledging an item an individual must typically provide some basic background information, have a valid bank account and produce a pay stub. Loans that are made are then due the next time the individual receives his or her paycheck. Thus the name - payday.

These types of companies are not typically good sources of longer term funding. Using a pawnshop or payday facility to pay down a 30-year mortgage is not really an option.(You have to be very careful when you take out a payday loan; to learn why, see Payday Loans Don't Pay.)


Alternative Credit Specialists
Cash America International (NYSE:CSH)
Cash America isn't some back-alley pawnshop. The company sports about 450 locations in the United States and enjoys a market cap of nearly $1 billion. The company is doing pretty well. It's coming off a great third quarter where it posted nearly 40% revenue growth to $231.5 million from $165.9 million last year. Earnings per share increased 31% increase to 55 cents a share from 42 cents in the comparable period last year.

The reason for the growth was an increase in fees and a growing demand for funds. At present, Wall Street figures the company will earn $2.50 a share this year and $2.99 per share in 2008, which implies a more than 19% rate of growth. If Cash America is able to hit those earnings targets, I think the stock could be worth $40 a share.

Ezcorp (Nasdaq:EZPW)
The company offers both pawn services and payday loans. According to its website it has 295 pawn locations in 11 states and Mexico and 380 "EZMoney" payday locations - many of which are located in southern and western states. The company enjoys an almost $500 million market cap.

Ezcorp recently turned in decent fourth quarter results, showing double-digit increases in both revenue in earnings over the comparable period last year. And going forward, Wall Street figures the company will earn $1.12 a share in the fiscal year ending September 2008 and $1.35 a share in fiscal 2009. In 2007 it earned 88 cents per share.

In short, based upon this expected growth of more than 20% each year, I think the shares would be more fairly valued in the $15 range which implies a roughly 25% upside potential.

Bottom Line
While banks are usually the first choice for consumer credit, many pawnshops and payday loan facilities also provide a valuable service. In difficult economic times, this method of lending should become even more popular. Cash America International and Ezcorp are both worth a look as the economy continues to slow.

To learn more, see Taking Global Macro Trends To The Bank and Macroeconomic Analysis.

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