Pawn-while-you-drive: Be warned — you won’t get your car back without a fight

Need cash now? The pawn-while-you-drive scheme appears to be an enticing option, promising consumers the ability to raise cash on their vehicles, bikes and boats – while still in possession of them.

These asset-based pawn schemes are a con: If and when you run into trouble with your repayments, you will lose your vehicle and getting it back – or receiving fair value for it – will be a struggle.

That’s because the National Credit Regulator insists that pawn-while-you-drive schemes are simply not pawn transactions, regulated by the National Credit Act (NCA), as the lenders – who are most often not registered credit providers – take ownership of consumers’ vehicles.

Under these schemes, the lender/“pawnbroker” enters into a sale agreement with a consumer whereby they “purchase” the consumer’s vehicle, which the customer in turn has to “lease” until the “loan” amount is repaid.

The lenders essentially take ownership of the consumers’ vehicles for the entire loan period. Should consumers fail to repay the loans, the lenders retain possession of the vehicles. And in most cases, consumers lose their vehicles.

On the surface, these schemes offer consumers – who might otherwise not meet traditional lenders’ requirements under the NCA – the ability to access a loan by using assets as security.

The consumer, purporting to “sell” their asset to the supplier, hands over the registration papers of their paid-off vehicles and then pays the supplier a monthly “rental” to retain possession of their vehicles, as a way to bypass affordability assessments required by the NCA.

The customer is also liable for service charges, fees or rental. The monthly “rental fee” usually amounts to around 30% of the amount advanced to the consumer, with a “rental” period of a maximum of three months, depending on the contract provisions. At the end of the contract period, the customer must repay the sale price value and the rental or fees due in full, or forfeit their asset.

Tracking devices are fitted to the vehicle, allowing the lender to trace the vehicle’s whereabouts, which they activate when – not if – the customer defaults, because that is the rule, not the exception. Then, they lose their vehicles and are told there’s no comeback.

Andile’s story

This is what happened to Andile [surname withheld], who wrote to Business Maverick complaining that he had entered into a loan agreement with a company in Woodmead, Johannesburg.

“I borrowed R50,000 and the agreement was that I would need to pay a monthly rental for my vehicle of R7,500 until I was able to pay back the full loan amount. A Tracker was installed in my car and they asked for my car papers. I paid until October 2022 when I had paid them in excess of R75,000. I could no longer afford the monthly payments and subsequently stopped paying.”

From 6 December 2022, he started receiving WhatsApps and phone calls asking for payment, which he ignored. On 12 December, he was accosted by two big “gentlemen” at a petrol station, who claimed to be repossessing the vehicle due to non-payment.

During the tussle over the car, the police (who he suspects may not have been officers, or who worked in cahoots with the repo men) arrived and Andile called his family, who all proceeded to the lenders’ “offices”, where they claimed he now needed to settle a further bill of R88,000 for them to release the car.

“They refused to provide me with any documentation about my account or provide me with a letter that they were taking my vehicle… by then, the ‘police’ who had escorted us had somehow slipped away, after they promised that they would ensure I get the necessary documentation and paperwork from the company ‘repossessing’ my car.”

Feeling unsafe, Andile felt he had no choice but to surrender his vehicle.

Not a pawn transaction

The NCA defines a pawn transaction as an agreement in terms of which one party advances money or grants credit to another, and at the time of doing so, takes possession of goods as security for the money advanced or credit granted; and (b) either:

(i) the estimated resale value of the goods exceeds the value of the money provided or the credit granted, or

(ii) a charge, fee or interest is imposed in respect of the agreement, or in respect of the amount loaned or the credit granted; and

(c) the party that advanced the money or granted the credit is entitled on expiry of a defined period to sell the goods and retain all the proceeds of the sale in settlement of the consumer’s obligations under the agreement.

The NCR argues that pawn-while-you-drive transactions are in fact credit agreements, not pawn transactions, and are subject to the NCA.

Since the suppliers extended credit to consumers, they were required to be registered as a credit provider. Failure to register as a credit provider is a contravention of sections 40(1) and 89(2)(d) of the NCA. The regulator furthermore says the agreements are unlawful and void as per the NCA, since no affordability assessments are conducted in any of the agreements.

Consumers are also not given pre-agreement statements and quotations, in contravention of section 93(2) of the NCA.

Unlawful interest, charges and fees on agreements are yet another breach of various sections of the act.

NCA spokesperson Didi Sebothoma said such pawn “arrangements” are simulated credit agreements in that the sale agreements and the lease agreements are concluded to circumvent the provisions of the NCA (ie conducting affordability assessments as this is not a requirement for a sale or lease agreement).

“Section 90 [of the NCA] sets out the unlawful provisions of a credit agreement. In particular, Section 90(2) specifically states that the provisions of a credit agreement are unlawful if, amongst others: their general purpose or effect is to defeat the purposes or policies of the NCA; deceive the consumer; or if they directly or indirectly purport to avoid a credit provider’s obligation or duty in terms of the NCA or authorises the credit provider to do anything that is unlawful in terms of the NCA or to fail to do anything that is required in terms of the NCA.”

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The NCR has already taken action against at least seven pawn-while-you-drive operators since it first referred cases against Allied Capital in April 2017, and then Sun Finance in July of that year, to the National Consumer Tribunal, which ruled that the schemes were prohibited conduct and therefore illegal.

Asked how many subsequent entities the NCR has taken action against, Sebothoma said they were currently investigating several cases and have others pending before the Tribunal.

“We have at least three more matters from our department pertaining to the same argument currently before the Tribunal, and at least four pending matters where we are awaiting conclusion of the legal advisers’ assessment and/or pleadings,” Sebothoma said.

Pawn-while-you-drive lenders are extorting consumers.

If you have been a victim of this scam, get in touch with the NCR or seek legal representation to recover your vehicle. If it’s already been sold, you are entitled to fair compensation. BM/DM