Johannesburg - The National Credit Regulator (NCR) is concerned about the rising number of consumers who pawn their motor vehicles in order to obtain loans.
“While pawning of assets for loans is allowed under the National Credit Act (NCA), the NCR would like to caution consumers against pawning their motor vehicles due to the high risk that they could lose them to pawn brokers if they are unable to repay the loans within the agreed time,” said Nthupang Magolego, senior legal adviser at the NCR.
The NCA allows the pawn broker to keep the consumer’s pawned asset as security and to return the asset to the consumer once the loan is repaid. If the loan is not repaid, the pawn broker can sell the asset and use the proceeds of the sale to settle the loan.
“Consumers are advised to read the pawn broker’s credit agreement carefully to avoid signing agreements that transfer ownership of their pawned assets to pawn brokers before they default. The pawned asset only serves as security for the loan and can only be sold if the consumer has not paid back the loan,” explained Magolego.
The pawn broker keeps the pawned asset at its own risk.
“Over and above the loan that consumers must pay back, some pawn brokers also charge consumers illegal charges such as storage charges, resulting in very expensive loans,” added Magolego.
A pawn transaction is a short-term credit transaction under the NCA. The interest which the pawn broker can charge is limited to 5% per month on the first loan and 3% per month on subsequent loans in one calendar year.
“Pawning assets for loans should ideally be used for small amounts of loans, where small assets such as cell phones, laptops or similar assets are pawned,” advised Magolego.
Wikus Olivier, debt management expert at DebtSafe told Fin24 that pawning an asset is usually done out of desperation or by a consumer who has a poor credit record.
"It is important that consumers who do enter into a pawn transaction, do so with a reputable credit provider and one who is registered with the National Credit Regulator. As with any credit agreement, a proper affordability assessment needs to be done before the credit is granted," explained Olivier.
"Credit providers who do not do a proper affordability assessment are reckless and one has to question their motives when considering the asset given up as security. Especially when it comes to vehicles."
When considering taking out a loan through a pawn transaction, Olivier would advise consumers to take a step back and really reconsider if a loan is the only way out or would the situation ease up if they gave it a week or two.
Clark Gardner of consumer watchdog Summit, told Fin24 that they have not seen any of such activity regarding the pawning of vehicles.
"However, we caution consumers against such desperate behaviour with only short term relief. We also caution credit providers that even though the vehicle is held as security, the consumer must still be able to afford the debt and a thorough affordability assessment must still take place," said Gardner.
"If this is not done, the lender will still be found guilty of reckless lending and risk losing a claim on such debt."
Neil Roets of Debt Rescue told Fin24 that pawning your vehicle means that you are already experiencing financial difficulties.
"This would just be a further loan on the same asset on which you already have a loan. The reality is that you cannot borrow your way out of debt, so pawning an asset which is already used as security on a current loan will only push you further into debt," said Roets.
For him the answer would be to get yourself out of debt. The National Credit Act introduced debt counselling, which in his view, has helped "hundreds of thousands of people" to pay off their debt in an affordable manner, without losing their assets.
"People should make use of this lifeline provided by government, instead of putting themselves even further into debt, by taking further loans on their assets that are already used as security for loans," said Roets.
"According to statistics provided by the National Credit Regulator, more than half of all credit active consumers are over over-indebted. People with financial difficulties should therefore not feel alone and should make rational decisions when it comes to their financial difficulties."
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