DEBT TRAP?

You can now get a cash loan against your valu­able goods, but be­ware of the fine print, writes An­gelique Ruzicka

CityPress - - Business -

SHOULD YOU TAKE OUT A SE­CURED LOAN?

Given South Africans’ high lev­els of debt – is there re­ally a place for these se­cured loan providers who don’t do much in the way of checks and bal­ances be­fore giv­ing con­sumers money to spend on what they like?

Frank Mag­wegwe, a cer­ti­fied fi­nan­cial plan­ner and man­ag­ing di­rec­tor of Thrive Fi­nan­cial Well­ness, points out: “The ma­jor­ity of pawn­shop cus­tomers typ­i­cally re­quire small loans that banks are gen­er­ally un­able or un­will­ing to pro­vide on a se­cured ba­sis. So, pawn­shops are nec­es­sary play­ers in the credit mar­ket.

“How­ever, it is im­por­tant to note that, in gen­eral, pawn shops charge high in­ter­est rates and, from a hu­man be­hav­iour per­spec­tive, en­cour­age a cy­cle that sees some peo­ple bring in the same item over and over for a loan. Some pawn­shops em­ploy preda­tory lend­ing prac­tices.”

The re­al­ity is that, for most peo­ple, there is lit­tle room for ma­noeu­vring when they find them­selves with un­ex­pected ex­penses. This is why Glen Jor­dan, di­rec­tor at IMB Fi­nan­cial Ser­vices, also feels that short-term loans are nec­es­sary and a vi­tal part of the fi­nan­cial sys­tem. But they need to be used ef­fec­tively.

“If the loan is be­ing taken for a nor­mal liv­ing ex­pense such as food or rent, it is time to do some se­ri­ous and proper bud­get­ing, oth­er­wise any short-term loan can lead a bor­rower into a debt trap – the trap where a bor­rower needs to take a loan to pay off another loan or to take a loan ev­ery month in or­der to reach the end of the month,” ex­plains Jor­dan.

Wor­ry­ingly, Pawn Ex­press’ model could eas­ily re­sult in a con­sumer end­ing up in a debt trap be­cause, ac­cord­ing to its rules, peo­ple can ap­ply for more than one loan in the 30-day pe­riod.

There are bound to be more providers that will of­fer sim­i­lar loans in the fu­ture and the added con­cern is that, with­out any fer­vent checks and record-keep­ing, peo­ple will be able to put up their as­sets in ex­change for cash when­ever and as of­ten as they wish.

They are con­ve­nient, though, and can be cheaper than per­sonal loans.

“Col­lat­eral loans should be cheaper than un­se­cured loans and, there­fore, if man­aged prop­erly, use­ful. If not man­aged ef­fec­tively, they can take as­sets away from those in need,” adds Jor­dan.

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