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Over the last decade, South Africa has witnessed massive growth in the Car Pawn industry, with an increasing number of companies offering cash loans against fully paid-up vehicles. This trend has been driven by sluggish economic growth, a banking system that is increasingly cautious about offering large loans and the surprisingly healthy state of the used-car market in South Africa.
In this tough economic climate, many people may find themselves unable to make ends meet, and the prospect of pawning your vehicle (the same way you would pawn anything else) may seem like a good idea – especially if you’re not over-reliant on having a vehicle.
For many businesses and individuals, using a car as collateral against a loan is the best way to generate cashflow without having to sell that vehicle.
A car pawn loan can provide short-term liquidity with minimal paperwork, or the types of delays associated with bank loan applications. However, not all companies that provide cash loans against cars adhere to the same operating principles, and this is important to know.
Unfortunately, some of the most tempting deals in the car pawn market can be detrimental to the financial well-being of consumers. Furthermore, all car pawn deals should be entered into with a clear understanding of the terms and implications of the agreement.
Here are some important factors to keep in mind if you’re considering pawning your car.
The first thing you need to know is that any company you approach for a loan against your car should be registered with the South African National Credit Regulator (NCR) and the Financial Services Board (FSB).
Companies that are registered with the NCR are expected to adhere to fair, responsible business practices as laid out in the National Credit Act of 2005.
Dealing with an NCR-registered company – such as Pawn My Car – provides the consumer with basic protection from exposure to unfair or predatory interest rates, fees and marketing practices.
A pawn-and-drive scheme allows car owners to pawn their car with a car pawn company against a cash loan, and then continue to drive that car until the loan is repaid. Sounds like a perfect solution, right?
Pawn-and-drive schemes may sound good, but carry hidden costs and complications that outweigh the benefit of driving your pawned car. For this reason, and many more, the NCR itself has frequently advised against going for these schemes.
Most companies offering pawn-and-drive schemes require you to sign over ownership of your vehicle, and once you’ve done that, you’ll not only have to pay interest and fees on your loan, but also pay rental on the use of your own vehicle.
When you want your vehicle back, you’ll need to purchase it back from the lender.
If you have no transport while your car is being held as security against your loan, you could consider renting a car instead. This is a better, safer option than a pawn-and-drive scheme.
You can rent a small hatch from a large car rental agency for around R5000 a month. Smaller rental agencies, such as Rent a Cheapie, use older vehicle models but offer more competitive pricing, with rentals available from as little as R110 a day.
Renting a car also protects you from the complications that can arise from damaging your car while on a pawn-and-drive scheme.
One of the biggest benefits of using your car as collateral against a loan is that your loan application is usually processed within a day. However, this quick turnaround time, combined with a sense of urgency on your part, might cause you to overlook critical fine print in your loan agreement.
Before signing off on your loan, ensure that you understand what your repayment terms are. This includes how much interest you’re expected to pay and what the implications will be if you fail to pay off your loan within the specified time period.
Some car pawn companies load additional fees into their agreements, on top of loan registration and interest fees. This may include fees for storing the vehicle while it is held as security against the loan, or even charging for insurance of the vehicle while it is in their possession.
It is important to note that car pawn companies are required to hold your vehicle at their own risk during the loan period and that additional charges, like storage, are considered illegal under the National Credit Act.
Using a car as security against a loan is most effective when you have a short-term cash flow problem and require bridging finance until this is resolved – or until payday rolls around.
This will minimize the interest you pay on your loan and reduce the risk of your losing possession of your car.
Avoid the temptation to get a loan on your car to settle outstanding debt, as this will result in more debt and the possible loss of an asset. A more effective way to handle outstanding debt is to apply for debt counselling.
Car pawn companies will typically lend you a percentage of the value of your vehicle for a loan, rather than the car’s full value.
Valuations are usually done in-house by the company. To ensure you get the fairest deal on your car, consider having your car valued by an independent assessor before proceeding with the loan deal.
Cars-for-cash companies, such as CarZar, can provide you with an idea of the immediate sale value of your vehicle and can assist you in determining your car’s book value.
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