There used to be pawn shops in almost every small town in South Africa. Now they are rife in big cities too. This is where one can get a collateral-based loan, which means the loan is secured by something of value. This doesn't mean something that has value to you but means nothing to someone else. You take something you own to a pawnshop and if the pawnbroker is interested, he will offer you a loan. But consumers need to be aware that what is perceived as valuable by such providers, in turn, for them, may not.
As most of these businesses are in private hands and trade as sole proprietors, the best case studies to make this point is probably with Cash Crusaders or Cash Converters, who operate more in the public domain. As a businesses, both enterprises fill an important gap in the market. There are a stores in many a city or town across the country. They also have very active online platforms, which offers both new and previously used items for sale, as well as short-term loans.
Cash Converters for example offers two loan products – both unsecured and secured. An unsecured loan requires the completion of an affordability assessment as well as a credit check. A secured loan, which we call a cash advance, on the other hand, doesn't require an affordability assessment or a credit check.
The National Credit Act prohibits a credit provider from entering into a reckless credit agreement with a prospective consumer. The Act obliges the credit provider to conduct a proper assessment of each consumer’s ability to meet their obligations, taking reasonable steps to investigate and evaluate the consumer’s understanding and appreciation of the obligations of the proposed agreement, and their ability to meet those obligations in a timely manner. The Act aims to increase access to credit for as many consumers as possible, while simultaneously preventing over-indebtedness.
However, as Cash Crusaders CFO Niel Du Plooy, pointed out that pawn transactions are specifically excluded from certain provisions of the Act, to the extent that they relate to reckless credit. “For this reason, arguments about reckless credit do not apply to pawn brokers and portions of the Cash Crusaders business,” he said.
The Cash Crusaders website, advertise a loan of R1,000 on terms of 30 days, an initiation fee of R173, an interest payment of R50 per month and a service fee of R115, which makes for a total repayment of R1330. Thereafter they will extend the repayment for a further month to up to a further five months, with a reduced service fee of R69 per month, without a further initiation fee. The table below illustrates the actual cost:
Despite the exclusions provided in the NCA, one must wonder why applicants need to make upfront arrangements for an extension if the Act does require the evaluation of a client’s ability to repay in a timely manner? Also playing around with words such as initiation and service fees to exceed the interest charge which is already as high as 60% annualised on its own, is odd at best.
But that being said, when the NCA took effect in 2007, the Cash Converters franchise expanded its services from buying-and-selling pre-owned quality goods and introduced its cash advance offering. According to its website, in 2009, the company launched the Personal Finance Centre, where customers could acquire loans against their salaries. From there, what started as a single store in Parow, has grown into a chain of more than 85 stores across southern Africa. Cash Crusaders have over 200 branches.
So business seems in this space seems to be good, as traditional lenders pull in the reins. Just this week SA’s largest bank by customer numbers, Capitec, reported credit impairments soaring by 80% to R6.3-billion.
CEO, Gerrie Fourie, told the media that the increase in credit impairments is due mainly to the deteriorating economy and the impact of higher inflation on clients. Net loans and advances grew by 17% to R78.2-billion. He said consumers were taking pressure with expenses going up, with income levels staying pretty much the same. This has more people in the country living outside of their means.
Furthermore, earlier this month, the FinScope Consumer Survey revealed that the main reason people borrowed money in 2022 was to pay for living expenses, specifically food and groceries.
So people are getting desperate, and the the perception created by pawn brokers such as Cash Crusaders and Cash Converters is that there are bargains to be had from goods that other consumers had sold or pawned for a quick buck. Consumers also rely on pawn shops when they are unable to find regular finance from a bank where credit assessments are conducted thoroughly, whether using their computer or lawnmower as collateral.
It’s usually consumers that find themselves in financial difficulty, and as a last resort offer to pawn an asset with the hope that their financial position will recover in time to retrieve their asset at a small premium, within the time limit. And it does not come cheap.
The business model has expanded over the years to include short-term loans against vehicles and future pay-checks. And if and when it enjoys oversight by the National Credit Regulator, most of these service providers mostly claim that there are no hidden fees or unexpected costs. All charges are discussed and fully disclosed before concluding transactions so an informed decision can be made, if the rule book is followed.
It may sound like a relatively fair deal, but once these these costs and fees are added and calculated the annualised cost will be substantially more expensive than for instance a regular unsecured loan from one of the better-known banks.
Also, which is mostly the case, even if assets are brought together with registration papers or valuation certifications, for an evaluation by the service provider, and the consumer will usually only qualify for a loan at a deep discount to the market value. This approach provides sufficient risk cover against depreciation for the service provider. In some cases, the service providers obtain a written offer from a potential second-hand dealer upfront who will buy the vehicle the moment the customer defaults.
Although the above-mentioned approach may provide some short-term relief to customers, their are plenty of complaints on social media that show plenty of regret.
On offering Cash Crusaders the right of reply, on the analysis of one of their service offerings, Niel du Plooy, CFO of the company wrote that: “Cash Crusaders only offers pawn loans. Our loan offering is intended to be both more customer centric and affordable, when compared to traditional 30-day pawn transactions. Our pawn loan product offers the customer an initial 30-day loan with the opportunity to extend the original loan 5 times. This gives the customer a better chance to keep their pledged item, even after the initial 30-day period has lapsed. This is achieved by paying a comparatively cheaper extension fee (consisting of service fees and interest), instead of having to settle the full fees and capital due “our loan offering is intended to be both more customer centric and affordable, when compared to traditional 30-day pawn transactions.”
Unfortunately, one can not expect even half such transparency from the other smaller players, and consumers should proceed with great caution if they are in search of any such a quick fix.
Kruger is an independent analyst.
PERSONAL FINANCE \