The pros and cons of pawnshop loans

DebtBusters, a leading debt counselling company, notes in their Q4 2022 Debt Index that South Africans are increasingly turning to unsecured loans to get them through the month.

While many consumers opt for personal loans or payday loans, another form of borrowing you may consider is a pawnshop loan, otherwise known as a cash-for-goods, asset-backed, or collateral loan. We examine the pros and cons of this type of borrowing, and who would benefit from it.

Tip: Find out whether you qualify for a personal loan with JustMoney.

What is a pawnshop, or collateral, loan?

A collateral loan is a fast, discreet loan given in exchange for assets in your possession, such as gold, diamonds, jewellery, Krugerrands, watches, artworks and antiques, or motor vehicles. Just about any item of value can be offered for assessment.

“You bring your assets to a lender, who advances money against that collateral,” says Margie Agustin of lending company LoanAgainst.

“The lender will keep the assets in safe storage for the duration of the loan. You service the interest monthly, and when you repay the capital, you get your collateral back – unless you can’t repay the loan.”

Who might benefit from a collateral loan?

Collateral loans are especially useful for people who don’t qualify for a personal loan, along with entrepreneurs, says Charles Meyerowitz, co-founder and CEO of lending company Lamna Financial.

“Because lending is risky for banks, many entrepreneurs approach lenders and use their own assets to release funds for capital,” he explains.

Lamna doesn’t accept stocks, bonds, firearms, electronic devices, real estate, or property deeds as collateral, although other lenders may.

Meyerowitz says the amount of the loan depends on the value of the asset. “Expert appraisers will determine the market value of your assets, and you’ll be offered a loan value based on their appraisal.”

The pros of a collateral loan

Meyerowitz says asset-backed loans are trouble-free, but some steps are taken to prevent fraud from occurring.

“We don’t need to perform due diligence, other than ensuring that the assets are wholly owned by the people in possession of them,” he notes. He adds that assets must be fully paid off before they are accepted.

Because lenders receive assets upfront, fees don’t accrue if loans aren’t repaid, and borrowers don’t face credit score damage, or liquidation.

“These loans are quick, simple and very transparent,” says Meyerowitz. “All that is at risk is the asset, nothing more, so you can’t harm your future self. You’re risking only what you already have.”

Funds are typically released within 12 to 24 hours of application.

The cons of a collateral loan

As with most forms of credit, collateral loans do attract interest. However, the maximum allowable rate is 5% per month when structured as a pawn transaction, says Meyerowitz.

Although you can offer your car as collateral, the National Credit Regulator (NCR) has issued specific warnings about the risk of vehicle loss if you can’t repay the loan.

So-called “pawn and drive” schemes – that is, offering your car as collateral but still driving it – involve handing ownership of the vehicle over to the lender.

This means you’ll be “renting” the car for the duration of the loan – and you may pay excessively high fees and interest if your lender doesn’t comply with the national credit act.

“These types of structures can be really expensive, costing around 20-30% per month,” says Meyerowitz.

Tips for borrowing

Meyerowitz and Agustin provide the following tips for prospective borrowers.

• Only approach companies that are registered with the NCR. All registered lenders will be listed on the NCR’s website.
• Check that the lender has a second-hand goods licence from the South African Police Service.
• Look for a credible lender who has a track record, and is part of a larger group.
• Never leave your bank card or PIN, SASSA card, or identity document with a credit provider.
• Make sure the interest rate you’re offered is not higher than the maximum rate proposed by the NCR.
• Visit www.lamna.co.za and www.loanagainst.co.za for more information about collateral loans.

Tip: Unit trusts can help you reach your savings goal and grow your retirement pot. Find out more here.