In this week’s blog, Consumer Debt Support (CDS) would like to take a deeper in-depth look into the growing market of consumers pledging (pawning vehicles as collateral) their vehicles for loans. What are the National Consumer Regulator’s (NCR) views on this type of loan agreement and is this business practice legal?

We would like to share more information with our readers to ensure consumers make good sound choices when entering such pledge, known as pawn loan agreements.

Here at CDS it is clear that when a consumer enters a pledge/pawn credit agreement, they’re most likely already in serious financial difficulty. Let us take an in-depth look at what a pledge (pawn) agreement is and what consumers should be on the lookout for to ensure they are protected when entering such a loan.

We will look at all the pitfalls before you decide to pledge (pawn) your vehicle as collateral for a loan. Consumers should be advised to read the pawn broker’s credit agreement carefully before signing any agreements that would transfer ownership of their assets (in this case their motor vehicle) to the pawn brokers when they find they can’t afford to pay the loan and therefore they are in default. The pawned vehicle, which is an asset to the consumer, only serves as security for the loan and can only be sold if the consumer has not paid back the loan. Consumers only find out once the loan agreement are signed the company lending them the money take full control over the asset which was pledged until the loan is fully paid back, it is safe to say that many consumers are so desperate to borrow money they lack interest in understanding the loan conditions. A pawn transaction is a short-term credit transaction under the National Credit Act (NCA).  The National Credit Regulator (NCR) has voiced their concern in March this year about the rising number of consumers who pawn their vehicles in order to obtain loans. Most of these consumer are so over-indebted and can’t obtain loans at other institutions due to their over-indebted status.

“While pawning of assets as collateral for cash loans is allowed under the National Credit Act (NCA), the National Credit Regulator (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,” says Nthupang Magolego, senior legal adviser at the NCR. (source: Fin24/money/debt 12 March 2017)

 As per the NCA the pawn broker is allowed to take control of the consumer’s asset (in this case the vehicle registered in the consumers name) as security and will only return the vehicle to the consumer once the loan is repaid as per the stipulated agreement.  What many consumers do not understand, is that if the loan is not repaid, the pawn broker can sell the asset without the consumer’s further consent, enforce the loan agreement and use the proceeds of the sale to settle the loan.

It is important for consumers who want to enter into a pawn transaction, to only deal with registered credit providers. Ensure the pawn dealers are registered with the NCR; they have the National Credit Regulator (NCR) window decal which should be visible and displayed on their premises; and their registration certificate should be visible on their premises. As with any credit agreement, a proper affordability assessment needs to be done to ensure the consumer can afford the monthly repayment plan of the loan. The problem the NCR is finding with these loan agreements is that many of the consumers applying for these loans are over-indebted, the concern is raised that many pawn loans are recklessly granted and the creditors are not registered with the NCR.

Dealing with unregistered pawn brokers offering these kind of loans, would most likely have an hidden agenda lending the registered owner money when pawning their vehicle as security. These dealers can charge any interest rates and all sorts of fees, where the consumer will eventually be the one with the loss of their vehicle being sold to cover the loan. Knowing your rights and the law is vital before applying for this kind of loan, understanding the reason why these companies must be registered with the NCR.

Do you really want to pawn your car for cash?   Consumer should really think very hard and be sensible before taking a loan through a pledge (pawn) transaction.  CDS advises, consumers to really sit down and weigh up the pros and cons of such a loan before considering to go ahead. Often, we hear from consumers that they are sorry they took the pawn loan — if they just waited a week or two, did proper research before taking that cash, their situation was much better before they took the loan. Knowing it was too late to turn back. Now realizing they can only get their car back when the loan is repaid in full.

CDS would like to ask this question: Can you really believe that when you are in financial difficulty, it would be wise to enter into another loan agreement, use an asset as security to borrow more money?. Why would you pay interest, service fees and storage fees on an asset you already own and most likely took five or six years to pay off in full. In most consumers cases the new loan will add another debt repayment to the other debt you are most likely struggling to pay every month. Finding this kind of solution that will give the consumer relief for one month, is very short-sighted and reckless. In other words, pushing yourself further into debt, reducing your available cash flow and placing more stress on affording debt repayments.

Here at CDS we would like to touch the topic again: the value of debt counselling that was introduced by the NCA, debt review helped thousands of consumers (moms, dads, aunties, uncles etc.) to pay off their debts, responsible and affordable, without having to pledge (pawn) their assets. The South African government has worked hard to ensure over-indebted consumers can receive immediate assistance through contacting registered debt counselors. Consumers should think rational and rather speak to one of our trained advisers with experience in affordable restructuring of debt, or just tap on this link http://debtcentre.co.za/contact-us/ complete all your details and we will call you.

In conclusion: During March 2017 statistics provided by the National Credit Regulator, more than 11 million the existing 24 million credit active consumers are over over-indebted. Consumers with financial difficulties should not feel alone. Make rational decisions when it comes to financial difficulties. Seek the help of registered debt counselors to assess your financial situation, visit a psychologist that can help and get the right help as prescribed by the Law.  Here at CDS we do understand that consumer can’t share their problems with just any one, we are specialists in the field that can help you now.