picture: 123RF/WELCOMIA
picture: 123RF/WELCOMIA

Taking out a loan against a secured asset, like your car, might seem a good idea when you have a cash-flow problem. But if that loan is a pawn transaction, be very careful.

With a pawn transaction, you can be charged up to 5% a month in interest, which is the most expensive form of credit. And since there's no obligation on the pawn broker to carry out an affordability assessment, you have no recourse for reckless lending.

Also, be on your guard when dealing with lenders that offer big loans and pass them off as pawn transactions in order to charge 5% interest a month.

Isabella Klynsmith, the supervisor in the complaints department at the National Credit Regulator (NCR), says that with a pawn transaction the creditor is limited to lending up to R8,000, even if the value of the pawned property is more than the amount lent.

"In the event of credit being extended in an amount exceeding R8,000, it will no longer be a pawn agreement and the credit provider will be required to conduct an affordability assessment before granting the loan," says Klynsmith.

But lenders such a Lamna Financial - which is the credit provider behind Pawn My Car - offer loans of up to 60% of the trade-in value of your paid-up car.

Sunday Times Money sent a reporter to investigate. The reporter was offered a loan of R45,000 from Pawn My Car and was not subject to an affordability assessment. The loan, described as a pawn transaction, was offered at an interest rate of 5% a month over a loan term of three months.

Charles Meyerowitz, the co-founder and a director of Lamna Financial, says the definition of a pawn transaction in the National Credit Act (NCA) does not limit the size of the transaction. "Thresholds do not apply to pawn transactions," he says.

But Trudie Broekmann, an attorney who specialises in consumer law, says the act is clear and that regulations that set out the monetary limits of NCA credit transactions form an integral part of the act. "It's surprising that a credit provider appears to not know or comply with the regulations to the main act which governs their business.

"A pawn transaction is for less than a total of R8,000, payable over a maximum of six months under a maximum interest rate of 5% per month.

"A loan of R45,000 secured by a car is consequently not covered by the NCA's classification of a pawn transaction. If this is a pawn transaction, it would be illegal. However, it could also be a pledge to secure a loan. South African law does not restrict a creditor from taking over movable goods if the credit consumer defaults on a pledge-based credit transaction. Consumers are therefore advised to heed the NCR's warning to not pawn their cars," says Broekmann.

According to Pawn My Car's website, "obtaining a short-term loan quickly can be very difficult through the traditional credit avenues and using your vehicle as collateral for access to funds enables you to raise money the same day without having to fill out forms, go through credit approval processes or even having [sic] a payslip. Pawnmycar.co.za is able to react quickly and privately with funds being available the same day if necessary.

"A word of advice - pawning your vehicle is a solution for a short-term cash-flow problem. If you do not think you will be able to make the repayments in terms of the loan agreement, do not pawn your vehicle," the website says.

'Desperate'

Russell Dickerson, the president of the Debt Counselling Association of SA, says that by the time a person considers pawning their car to cover some or other expense, "they are desperate, no longer creditworthy and have been refused credit via the normal avenues".

"They generally don't understand the agreement and by this point don't care, as long as they can get some money to relieve their immediate pressure. Once the pressure is off they start to realise what they've done, and then start looking for help. I have yet to see a client who has pawned their car and had a successful experience. All have lost their cars or are in the process of losing their cars."

If you're cash-strapped, dipping into any prepaid funds in your home loan (assuming it's an access bond) should be your first choice.

If you haven't paid anything extra into your bond, and are still creditworthy, a personal loan would be your next best bet and cost you less than a pawn transaction.

Borrowing to meet lifestyle costs, however, will only get you deeper into debt. You need to make a longer-term, more sustainable plan to earn more or spend less, settle your debts and live within your means.

When you're considering pawning your car for substantially less than the trade value, find out what you could get for your car from the likes of We Buy Cars.

Faan van der Walt, CEO of We Buy Cars, says he has been approached by consumers who have pawned their vehicles and been unable to pay back the loan. "They've approached us the day before the debt is due, asking how much we would give them for their cars. But by that stage, it's impossible to buy the car. Strict terms and conditions apply to those pawn transactions."