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