When Sophie was short of cash to buy her dream studio apartment in London, she decided to pawn her £8,000 ($10,000) Hermes Birkin handbag that her fiancé got her for their two-year anniversary.
"It was the most practical thing to do. I would have unnecessarily paid more interest if I had gone for a higher mortgage, so I decided to increase my equity stake by getting a loan against my Hermes handbag," 25-year old Sophie Richards told CNBC on the phone.
The world of luxury handbags is a glamorous one and using these expensive handbags as collateral to secure a loan is a growing industry in itself. While globally, the premium handbag and accessories market was valued at $48 billion in 2016, North America was worth $11.6 billion and Europe came in at $6.4 billion, according to industry research firm Koncept Analytics.
California-based Beverly Loan Company, one of the first pawn shops in the U.S. to advertise pawn loans against upscale handbags, told CNBC via email that luxury handbags are the fastest growing asset class. The company has very specific criteria for lending against handbag.
"If the bag is not Hermes, Chanel or a close equivalent and does not have a retail price of over $5,000, then it is not for Beverly Loan Company," the company said on its website. "We also require that the handbag is in excellent condition and in most cases we require provenance, specifically a receipt from the retailer where it was purchased."
Jordan Tabach-Bank, owner and chief executive officer of Beverly Loan Company, explained that not too many lenders are comfortable with this business as they lack the expertise to deal in luxury handbags because of "spot-on replicas" that have flooded the markets.
"While our average handbag loan is about $5,000, I can tell you that we recently made a loan of $60,000 on a Hermes White Matte Niloticus Himalayan Crocodile Birkin."
How does it work?
The process is fairly straightforward – if you want a loan, take your luxury handbag to one of the pawnbrokers who specialize in this area. They take a quick look at the condition of the bag, and you are out of the door with cash. The handbags are stored in a secured vault till the time you pay off the loan. There is generally, no credit check and the loans are given for a period of four to six months.
"When we inspect a bag first and foremost we make sure it is authentic and in excellent condition. We can always provide a higher dollar figure if the bag includes the box, dust bag, cites (for exotic skins) and original receipts (which always help with authentication). We also know what colors sell best and we know how important condition is to our clientele, and lend accordingly," Tabach-Bank said.
While some lenders are quite specific about brands they want to lend against, some others are a bit more flexible. London-based Prestige Pawnbrokers lend against a range of luxury products including handbags, wine, art and watches among others. The company on its website lists a range of designer brands that they lend against. These include Chanel, Hermes, Louis Vuitton, Mulberry, Prada, Gucci, Miu Miu, Dio and D&G among others.
"Many of our clients are finding this to be an extremely effective method of raising finance quickly - especially for designer handbag that you may no longer use or was an unwanted gift or has simply fallen out of fashion with your style" the company said on its website.
Risky business?
But while this is a fairly easy way of raising capital for consumers, it comes with risks. One of the biggest risks is default. What if the borrower fails to pay the loan?
"If the borrower is unable to pay the loan in full they can rewrite the loan by simply paying the accrued interest, thereby extending their due date," Tabach-Bank explained.
If the clients choose not to extend the loan then the lender becomes the owner of the collateral and can sell it to the public. The company, however, makes several attempts at contacting the borrower before foreclosure.
Another risk is dealing with fakes. A number of pawnbrokers face this on a regular basis and if the handbag is fake, the loan is not approved.
"The handbag speaks for itself; we do not perform credit checks. Just bring your ID and your bag. Our clients are in and out with cash in hand in a matter of minutes," Tabach-Bank said.