Is pawning your car for a loan a good idea?

Let's just jump straight in - it's not a great time to be South African (apart from the Boks win). With unemployment sky high, using your car as collateral for a loan could just mean the difference between making ends meet and being declared insolvent.  This is most likely many people's reality and if you are one of them, then don't be ashamed. You are not alone.

You could say that help is at hand - but being cautious with how you define "help".  If you're prepared to risk your future options by leveraging your car ownership, then pawning your car for a bit of short term financial relief is probably not a terrible solution.  It might not be the best thing ever, but it's certainly an option - so long as you see a change in your future and can proactively take charge and do what must be done to secure your future income. If you don't have clarity or at least hope on your short to medium term financial recovery, then perhaps you should consider selling your car instead of delaying financial day zero, as you will get more from your car on sale than as a loan default settlement.

You cannot take a loan on a loan - ever.  As in ever.  Doing this will result in a downward spiral to guaranteed financial ruin and poverty. It goes without saying then, that one of the foremost financial stipulations of pawning your car would be that you absolutely have to own it outright.  It cannot be financed and you will need the original proof of ownership.

Most car pawning involves you signing your car over to the company and they then store it in a secure lockup where it will not be driven.  You should check to see if the car is insured under their policy agreement, because if it is, then you are able to cancel your current insurance and that will free up some of your unnecessary expenditure for the duration of the pawn agreement.

Pawn and Drive

For some people thought, actually owning a car is imperative as their lives absolutely depend on transportation freedom.  It must be categorically stated that Pawn & Drive offers are mostly going to result in a great deal of unhappiness and you really should investigate selling your car either privately (can be risky) or to a dealership (you will get less than a private sale) before you go this route.  Almost all Pawn and Drive agreements mean that you will be paying unreasonably high repayment amounts and unless you can service these high monthly tariffs then you will be far worse off when your car is repossessed.  You will then be stuck with having to settle your original loan amount and the interested repayments from the car you no longer own.  It's not the best financial outcome but if you think you can pawn and drive successfully then here is a list of a few companies that might be able to help you.

Chances are though, that if you are out of work for few months but still have a bond to service or some other looming financial obligation then pawning your car might be an acceptable option in the short term.   Note: In the short term.

Points to consider

Make sure that you are being offered a reasonable interest rate on your loan offer.  If at all possible, try to work with a company that is NCR (National Credit Regulator) accredited, as they will be mandated to offer you a loan that is fair and reasonable.  You are already in a financial bind and cannot afford to be taken advantage over so really look after your self and walk away from non- NCR deals.  Just don't do yourself in, ok!

What is my car worth?

You will be offered a loan amount that is considerably less than your car is worth.  No problem there - the pawn company needs to cover your loan and the risk.  However, should you default on your car and the car is sold by the pawn company to cover the outstanding loan, then you should be cautious and discuss what your car is actually worth at the time of pawning.  In 2 years time your car will no doubt be worth less so just be sure that you have determined the value of the car before you leave it too late.  Your intention might well be to complete repayments on the loan, but should you not be able to and the car is sold - then don't be sorry.

You can find out what your car is worth by asking a registered car dealer, or by calling your car insurance and asking them.  Another alternative is to use a website service - but you will no doubt be asked to pay a small fee.

NCR (National Credit Regulator)

The National Credit Regulator is the governments official organisation and all registered credit providers will be listed on their database.  They ensure that companies charge a fair and reasonable amount of interest and payment terms. All companies displaying NCR branding will be registered on the following website:
https://www.ncr.org.za/

Final Thoughts

If at all possible, you should consider selling your car before you pawn it. I know you might think it's better to hang onto the car as "its yours" but unless you know for certain that financial help such as inheritance or annuity plans/dividends is on it's way then pawning is not the best option.  Don't be sentimental with cars - they are mass produced for anyone who will buy them.

High Value assets such as sports cars, trucks, super bikes (and yachts) are best left to specialists.  One such company is Lamna and they are NCR accredited so they are regulated in the amount of interest they can charge you on the loan.

Author: Pierre Theron